BMO, CIBC, RBC, Scotia and TD All Offering 2.99%
Well, they’ve done it again! BMO shattered the competition for a second time this year by dropping their 5 year fixed rate to 2.99 per cent (available until March 28th). Other lenders are currently offering special discounted rates between 3 and 3.25 per cent for a 5 year term and most of their products offer increased flexibility in terms of prepayment allowances.
How did CIBC, RBC, TD and Scotia respond? With the same “If you can’t beat ‘em, join ‘em” theory they had back in January 2012; offering the same 2.99 per cent rate on their 4 year fixed products and most promotional rates are good until March 31st. Other lenders available through the broker channel are pricing more competitively on the 4 year term with rates ranging between 2.89 per cent and 3.29 per cent. Who knows how long these offers will really be on the table for, back in January they were revoked prior to their expiry date.
BMO: Under the Microscope
Behind the 2.99 per cent rate from BMO there are (what some would pin as) limitations, when compared to their standard product line. Here are the parameters:
- Limited to a 25 year amortization (vs. 30 year amortization with standard products)
- 10/10 lump sum/increase regular payment options (vs. regular 20/20) – this means to can top up your monthly payment 10 per cent and make an annual lump sum payment up to 10 percent without incurring any prepayment penalties.
- “Full repayment before maturity can only occur if the property is sold to an unrelated purchaser at fair market value or if the product is refinanced into another BMO mortgage product”
The Canadian Government has clearly voiced their concerns around current consumer debt levels and the seemingly unlimited source of funds available to Canadians. However the low rate paired with a limited 25 year amortization has alleviated some of the apprehension towards cheap money. This is an obvious response as a lower amortization makes it increasingly difficult to qualify a client based on their ability to service a higher principle and interest payment.
As far as the 10/10 limited prepayment is concerned, most aren’t actually too concerned. CAAMP conducted a survey and found that only 17 percent of mortgage holders made lump sum payments to their mortgage in 2011, so to most this allowance is quite acceptable.
Ball and Chained to BMO for the Next 5 Years
The real kicker is the FULLY closed terms. Meaning that you have no early negotiating power, you can’t refinance with another lender and you are tied to BMO for the full term. BMO will let you renew into another product of theirs, but what if they do not have the best rates at the time? Too bad, so sad! BMO does not have to offer you discretionary pricing at the time of renewal, there will be penalties to refinance with them and they are not obligated to early-renew with you. The only way that you can get out of the mortgage before the end of the term is with an arm’s length sale of the property. This offer is only valid for owner occupied homes and is available over the next two weeks.
A Look at the Bond Market
Since the beginning of 2012, there has been over an 18 per cent increase in the 5 year bond yield and nearly a 7 per cent increase over the month of March alone (stats can be found at the Bank of Canada website). There are many reasons contributing to the bullish trait of the bond yield market; namely economic factors (both in North America and globally), demand for bonds etc. But I’d like to focus on what’s happening this month – spring has sprung!
There is a seasonal increase in the demand for mortgages in the springtime months and banks hedge against the mortgages they issue with interest rate swap contracts. The increased demand for mortgage funding and hedging activity could lead to higher bond yields, which could mean an increase in fixed rates accordingly. Historically speaking, the bond yields tend to elevate during the March and April months and mortgage rates (on average) tend to do the same. Over the last 38 years, the conventional 5 year mortgage rate has increased more times than not in April. In 20 of the last 38 years the mortgage rate has increased between the March and April, in 10 of the 38 years the mortgage rate has decreased and in only 8 years it stayed the same. And now with the expiry dates for the major 5 banks scheduled for the end of the month, history will likely repeat itself.
RateSupermarket.ca Week in Review
The biggest mover this week in rates was the 4 year rate. I know you would expect there to be a drop in the rate considering the big five bank’s announcements, however it was an increase! Nonetheless, the 4 year fixed closed increased by only 5 basis points. The only other movement in the best rates was the 7 year fixed closed which dropped 1 bps.
Interestingly enough with the release of the 5 and 4 year fixed rates at 2.99 per cent, we didn’t see a huge change in what RateSupermarket.ca visitors were searching for. The 5 year variable rate still holds the most popular search at 44.8 per cent (down from 46.3 per cent last week). The 5 year fixed rate comes in second at 40.5 per cent (slightly up from 39.7 per cent last week) and still maintaining third place position in the popularity contest is the 1 year fixed rate, currently 4.3 per cent of visitors are searching this rate which is up from last week at 4.1 per cent.
The 4 year fixed rate is actually one of the least popular rates searched on RateSupermarket.ca . Only 1.1 per cent of searches went to the 4 year fixed rate (only ahead of the 6 month and 7 year fixed open rates and the 1 and 3 year variable closed rates).