This past Tuesday the Bank of Canada had their first meeting of 2012 to discuss any changes they were going to make to the overnight lending rate. Low and behold … no change. This came as no big surprise to Canadians and the overnight rate remains steady at 1 percent. FYI the next meeting is scheduled for March 8th, 2012.
How does this impact the mortgage industry exactly?
Well, the overnight lending rate (the rate at which banks lend money to each other) has a direct influence on the prime lending rate (the rate at which banks lend money to consumers). Think of the prime lending rate like the sun in the variable mortgage rate’s solar system since all variable rates revolve around prime. Bottom line, no increase in prime means no increase in variable rate mortgages and no increase in monthly mortgage payments.
Release the HOUNDS!
Talk about some hot competition! Last Friday, BMO announced a special 2.99 percent 5 year fixed rate. RBC quickly responded by offering the same 2.99 percent but only for a 4 year term. TD matched RBC’s 2.99 percent 4 year fixed and ING is now offering a 3.99 percent not on a 4, not a 5 but a 10 year fixed (wow)! After mulling over and digesting what this might mean for their market share and presence in the competitive mortgage market over the weekend, Scotiabank announced their 2.89 percent 3 year fixed offer on Monday.
The Three Little P’s (no, not piggys)
Given the super low rates that hit the market over this past week, it’s even more important for consumers to know what other details they need to consider before signing on the dotted line. Think about the 3 P’s: pre-payment privileges, portability and penalties. These options could make or break that perfectly low mortgage rate.
1. Pre-Payment Options
According to a survey conducted by CAAMP, 17 percent of mortgage holders made lump sum payments in 2011 and those who did prepaid an average of 7.8 percent. For this to be you next year you should ensure that your ability to make lump sum payments coincides with the option to do so. Generally speaking, pre-payment privileges are around 15-20 percent of the original principal amount, but sometimes “no frill” mortgages will offer a lower pre-payment privilege at a lower rate.
So before you get enticed by that really low mortgage rate, check out the pre-payment options. If the low mortgage rate limits your ability to pay down your mortgage faster, it may cost you more in interest in the long run. On the same note, make sure you are not paying a higher rate for a mortgage feature that you are not taking full advantage of.
Really love that low 10 year fixed rate but think there is a chance you could move in the next 10 years? If the mortgage you have is portable, you’re in good shape! Portability can save you money down the road if your rate (a.k.a. today’s historically low rate) is lower than the rates at the time you move in the future. A portable mortgage allows you to transfer your mortgage to a new property (subject to a credit approval and sometimes a property appraisal), avoiding any penalties of breaking your mortgage.
Not to worry if the new mortgage you need is larger than the remaining balance on your existing mortgage, you can actually apply for a larger amount and your rate will be a weighted average between your old rate and the current rates offered.
Your dream house just went up for sale and after years of working for the man, it is actually in your budget! But you didn’t have this helpful blog to read when you first shopped for a mortgage and now you realize your mortgage doesn’t have a portability option. Oops! The good news is you can break your mortgage and get a whole new one for your dream home. The bad news is it’s going to cost you a mortgage penalty, likely the greater of 3 months interest or the interest rate differential (IRD).
Before you commit to any mortgage product make sure you have an understanding about what it will cost you if you need to break the contract and get out early.
Today’s Mortgage Shopper
If you’re currently in the market for a mortgage, consult with a mortgage professional before making a decision and don’t be ashamed to ask a lot of questions. You shouldn’t only consider the lowest possible rate when searching, look at the product details as well. Also, it’s not just about finding a mortgage that meets your needs today, but also in 1, 3 and 5 years time. Yes the 5 year rates are great, but if you’re home is only a stepping stone and you can’t port the rate later you may want to consider a shorter term. A custom mortgage for a custom home.