We said “goodbye” to the super low 2.99% 5 year fixed rates last week and said “hello” to a still very competitive 3.08% 5 year fixed rate this week (source: Best Mortgage Rates Canada).
For most rate shoppers, this increase of 10 bps can be traumatizing. Consumers tend to drool over a mortgage rate that is even just a few percentage points (or more) below other advertised rates. But let’s not forget that not all low rates are what they seem. Some super low mortgage rates typically signal a no-frills product that isn’t fully loaded with the features and benefits that might be important to you. Is shopping for a mortgage rate just like buying anything else; you get what you pay for?
2.99% vs. 3.08% … You Say Tomato, I Say Tomahto
At first glance why would anyone in their right mind opt for the 3.08% mortgage rate?!! To the rate shopper, these are two very different numbers and the 2.99% rate is quite obviously the best choice. But, they aren’t so different when you compare the monthly/bi-weekly payments of a $250,000 mortgage with a 25 year amortization:
@ 2.99%: $1,181.83mo/$545.46bi-weekly
@ 3.08%: $1,193.40mo/$550.80bi-weekly
Yes as expected there is an increase in the payment. But, if this is going to make or break your monthly budget maybe you should re-think what you can afford! And call me crazy, but I would want to know more about what each product offers before being shackled to the lower 2.99%.
BUYER BEWARE: Does the Rate Sound too Good to be True?
How are lenders able to offer such a low rate? And what’s the catch, you might ask? More times than not, lower rates are not offered on a standard product, rather it is a “no-frills” mortgage. The no-frills mortgage might be a match made in heaven for you, it all depends on your need for flexibility and how important the 3P’s are to you (Pre-payment options, portability and penalties). These products are also sometimes used in a bait and switch technique, so ensure that if you are in fact looking for a basic product that you aren’t up-sold into a more profitable mortgage (profitable for the lender that is).
If you take away all the bells and whistles of a standard mortgage, what you’re left with is a no-frills mortgage. No-frills mortgages are stripped down to eliminate features that add cost. They are designed to appeal to frugal buyers who may not qualify at higher rates and are less likely to make lump-sum payments throughout the term. When compared to a standard mortgage, no-frills mortgages offer:
- Minimal pre-payment privileges (0-10% vs. 10-20% with standard product)
- Minimal payment increases (0-10% vs. 20-100% with standard product)
- Quick close deadlines (30 days vs. up to 120 with standard product)
- Real deals only (no pre-approvals)
- A lack of portability
- Lower amortization (capped at 25 years vs. 30 years with standard product)
Is It Right for Me?
Just like any other big financial decision that you make in your life, the answer to this question is very much dependent on your personal situation. What I can say is if you aren’t going to take advantage of the additional features offered with a higher rate and you are certain that your situation will not change over the course of the term (typically 5 years), then a no-frills product could be a great choice! But without a crystal ball it can be hard to look into the future, you could get a promotion, you could lose your job or your family could grow and you might need to upgrade. The lack of flexibility with the no-frills product could actually cost you more to get out of in the future than the interest savings you’ve captured.
Just keep in mind that the interest rate is not the only feature to consider when choosing a mortgage product that is right for you and in the current market there are still some great low mortgage rates available, fully loaded with features so you can have your cake and eat it too!
RateSupermarket.ca Week in Review
Wiarton Willie (Ontario) and Shubenacadie Sam (Nova Scotia) didn’t see their shadows on February 2nd, 2012 and predicted that spring is on its way! For Ontarians, this means that their mild temperatures should stick around which is exactly what low mortgage rates have done this week as well. No big changes here!
Still, taking the search by storm are the 5 year rates! Half of RateSupermarket.ca visitors searched, and searched, and searched for the 5 year fixed closed rates (maybe trying to find the expired special rate of 2.99%?). The other half (48 per cent) searched for the 5 year variable closed rates, and the next leading searches were for 4 year fixed closed (0.7 per cent) and 10 year fixed closed (0.5 per cent).