In the News this Week: No Changes to the Overnight Lending Rate
Earlier this week (Tuesday April 17th) the Bank of Canada announced that it will maintain its target for the overnight rate. This marked the 13th consecutive time that rates have been left alone over the past 19 months. Although the Canadian economy has exceeded the Bank’s expectations from January and the U.S.’s own recovery has been on the up and up, it all wasn’t enough to have the BOC increase their overnight lending rate which remains steady at 1 per cent. This pleases mortgage brokers and consumers alike as the prime lending rate also remains at the 3 per cent level.
BUYER BEWARE … Shedding Some Light on the Cash Back Mortgage
You might be wondering what a cash back mortgage is – it is exactly what it sounds like. When your mortgage funds you receive a set percentage back in cash to go towards, well whatever you want! Some will turn around and use a 5 per cent cash back amount as their down payment, a sly move around the minimum down payment required to qualify for a mortgage in Canada, unless you are using a private lender of course. The pro with this type of mortgage is that you can do whatever you want with the cash back!
The Cons: Nothing Comes for Free
I did some research around cash back mortgage rates among the major banks and found that on the surface, they are priced at par with regular fixed mortgage rates. This makes them quite attractive to the average consumer. However, when taking a deeper look I found out that the banks only offer discretionary pricing on their regular mortgage products and not on cash back mortgages; making the effective cash back mortgage rates higher than the standard fixed rates. No room for negotiating a cash back rate!
If paying the posted rate isn’t bad enough, try getting out of a cash back mortgage. Is it possible? Yes! Is it difficult? Not really. Is it expensive? OH YA! How do you feel about your first born or an arm and a leg? These are things you may need to give up in order to pay out the penalty for breaking a cash back mortgage. Sure the $9,000 in your pocket on closing was nice, but try paying it back on top of the standard IRD/3 month interest penalty charge. It will most definitely cost you a pretty penny.
Claims to “pay off your mortgage 11 years sooner” with a Cash Back Mortgage?!
One of the major banks has advertised that you can pay off your mortgage 11 years faster with a 5 year fixed cash back mortgage at 4.24 per cent. Not only will you pay off your mortgage faster but they will even give you $4,000 cash at closing (this is based on a 2 per cent cash back amount on a $200,000 mortgage). That sounds great doesn’t it, so what’s the catch?
The catch is that their scenario is conditional upon your ability to pay more – funny … when you pay more you pay off your mortgage faster! So I guess paying off your mortgage 11 years sooner really isn’t dependent on the advertised cash back product, which offers a higher rate and is more expensive if you decide to break it down the road. With the same suggested principals you could pay off any mortgage faster, so why settle for a higher rate!?
The Offer Under the Microscope
In order to be mortgage free (based on $200,000 principal, 4.24 per cent 5 year fixed rate, 25 year amortization and monthly payments) 11 years earlier you have to increase your monthly payment frequency to accelerated bi-weekly payments, then increase your bi-weekly payments by nearly 9.5 per cent and finally make lump-sum payments of $3,000 per year.
From Scenario One – Two: By increasing the payment frequency from monthly payments to accelerated bi-weekly you can shave over 3 years off of your mortgage (mind you, the equivalent monthly payment translates to $1,168.10 which is nearly $90.00 extra each month).
From Scenario Two – Three: By increasing your bi-weekly accelerated payment to $590.00 (9.44 per cent increase) you can pay off your mortgage nearly 5 and a half years earlier (note: the equivalent monthly payment now translates to $1,278.33 which is over $200.00 extra each month).
From Scenario Three – Four: Now that you’ve increased your total annual principal and interest payments by approximately $2,400.00, this example also requires you to pay an additional lump sum payment of $3,000 per year. By doing this, you will decrease your total amortization to 14.8 years from the original 25 years.
Bottom line: It isn’t the mortgage product that is helping you to shave years off of your mortgage, it is taking advantage of pre-payment privileges which you can do with any product!
RateSupermarket.ca Week in Review
Another week of little to no movements in the best mortgage rates across Canada. Little on the variable front and no movements on the fixed front. The single change over the last week was an increase in the 5 year variable closed rate, up 5 bps to 2.75 per cent. Do you want to know when the best mortgage rates change? Be the first to know and sign up for RateAlert, RateSupermarket.ca will e-mail you a daily digest of the mortgage rates that have changed in your area!
Still remaining in the top 1 and 2 spot for most frequently searched mortgages are 5 year fixed (38.5 per cent of visitors searched for this rate) and the 5 year variable (32.9 per cent). Gaining in popularity over the last week is the 3 year fixed rate, last week 4.8 per cent of visitors were searching for this rate and this week 5.5 per cent have. Have you created an account on RateSupermarket.ca yet? Get to it! It allows you to save your searches so that you can easily sign-in and see the current best mortgage rate for your needs.