If you thought that mortgage rates hit bottom, well, the bottom just dropped again…effectively speaking.
Radius Financial, one of Canada’s most competitive insured mortgage lenders, just launched a new 0.99% adjustable-rate mortgage (ARM) for default-insured mortgages. It’s available only through Radius-approved mortgage brokers.
Radius’s contract interest rate ties HSBC’s 0.99% rate, which launched in December. But intelliMortgage Inc., an online mortgage broker and RATESDOTCA sister company, is advertising the product at an effective rate of 0.95%. That’s a 0.99% contract rate plus a 0.04%-point-extra discount in the form of upfront cash back.
That officially makes it the lowest advertised effective mortgage rate in Canadian history.
Radius Founder and Chairman Alex Haditaghi pointed out that rates under 1% not only save people a ton of interest, but “you will also be paying a significant amount of money towards your principal.”
That’s true. On day one, your payment per $100,000 of mortgage would only be $376.33, of which a whopping 78% goes to principal (assuming a 25-year amortization).
Compare that to a 1.99% mortgage, which costs $422.97 a month and where only 61% goes to principal.
“This product is best suited for borrowers who are wanting the lowest possible rate now and are comfortable taking on some interest rate risk knowing their interest rate may change over the term of the mortgage,” said Radius CEO Ron Swift. “To help mitigate this risk, we allow borrowers to convert into a new 5-year fixed-rate mortgage at our published rate for new business.” That’s opposed to the materially higher “special offer” rates advertised by banks.
Again, this special applies only to insured mortgages (21.5% of new mortgages are insured, according to the Bank of Canada). As usual, uninsured borrowers must pay more, at least 1.25%, according to RATESDOTCA.
To Lock or Not to Lock
This record-low offer adds a new twist for borrowers trying to figure out whether to lock in — specifically those needing a new default-insured mortgage or those switching over an existing insured mortgage.
The Bank of Canada told us last week that rates will likely start climbing in the second half of 2022, for what that’s worth. As recently as February, the Bank forecast its first rate hike in 2023. Before that, Governor Tiff Macklem told Canadians, “you can be confident that interest rates will be low for a long time.”
That’s made a lot of people more open to taking chances and floating their mortgage for a few years.
How a 0.95% Rate Performs in Scenario Modelling
One way to decide whether to fix or float is to model out rates based on reasonable future assumptions. It's not foolproof but it's a useful way to assess potential risk.
We did that and it revealed the following.
- Assuming you’re choosing between the lowest 3-year fixed rate in Canada (1.34%) and the lowest 3-year variable rate (0.95%)
- Assuming the Bank of Canada hikes rates five times in the next three years, starting in 2022 (which matches the bond market’s forecast)…
…you would end up slightly better off in a fixed, by about $214 per $100,000 after three years.
Of course, hypotheticals and actual outcomes rarely agree. So take this with a grain of salt. The message is: you're not going to be really right or really wrong regardless of which term you pick.
Rates are based on a $300,000 mortgage.
Why a 3-year Term?
A 3-year ARM's real value is flexibility.
“We decided to introduce our 3 yr ARM product because…we know not all borrowers want a 5-year fixed mortgage,” said Swift.
For one thing, you don’t have to wait five years for your term to be up. That means that in as few as 32 months (since you can lock in a new rate 120 days in advance) you can:
- switch into the best available fixed rate with no penalty
- move to a new home and get the best available rates
- refinance and get the best available rates.
…all without a prepayment charge.
That matters because: (A) penalties are expensive, and (B) the average mortgagor breaks or renegotiates their mortgage after just 3.8 years, statistically speaking.
Cost of funds was also a factor in Radius choosing this 3-year term. Compared to a 5-year, a 3-year term “align[s] economically with our funders,” Swift said.
Features-wise, this product has most of the popular bells and whistles: 20% annual prepayment privileges, a reasonable 3-months' interest charge to break early, ability to convert to a standard 5-year fixed term at discounted rates anytime without penalty or cost.
As for the monthly payments, being an adjustable-rate mortgage, the payments move when prime rate moves. That differs from a variable mortgage where the payment is usually fixed. The good news is that even if rates go up and the payment goes up, you’ll maintain the same amortization. That way, you don’t get behind on making principal payments.
If you’re worried about the effects of future BoC rate hikes, here’s how much the payments could go up on a $300,000 mortgage if rates rise:
- 1.00%-point: Payments would increase $139 per month
- 1.50%-points: Payments would increase $212 per month
- 2.00%-points: Payments would increase $288 per month
- 2.50%-points: Payments would increase $446 per month
If you’re risk-tolerant and willing to bet that a big fat upfront rate edge will save you more than the extra interest you pay after rates start to normalize, then it’s a mortgage to consider.
It’s also right up the alley of people who need shorter-term insured financing.