The mortgage rate limbo that took the Canadian housing market by storm this summer has returned, with the 2.89 per cent five year fixed rate mortgage reappearing on the board. Those following the rate roller coaster will recall the sensation this July, as lenders one-upped each other’s discounts in the aftermath of CMHC mortgage affordability restrictions – and prospective buyers snapped them up.
Things subsided somewhat in August, as some big bank lenders raised their posted fixed rates. It appeared the record low rush had ended – until now, as Advent Mortgage Services returns the rate to Ontario, Northwest Territories, and Yukon.
About The Rate
Offered by a major lender through AMS, this rock-bottom rate is only available for high ratio mortgages (with less than 20 per cent down on the home purchase). While the rate does not apply to pre-approvals, switches or refinances, buyers will still have the option of paying up to a yearly 15 per cent lump sum in order to reduce their amortization as well as increasing their regular payment amount by 15 per cent. It also features a 60-day rate hold.
Calculating The High-Risk Cost
A rate designed to give high-ratio home buyers a break is bound to be popular – according to Genworth Financial, 50 per cent of mortgage holders fall into this category. The offer should especially resound with first timer buyers, who found their buying options docked when the CMHC reduced the maximum high-ratio amortization to 25 years from 30, and limited HELOCs to only 65 per cent of their home’s loan-to-value.
Paying For (The Bank’s) Peace of Mind
Because those putting less than 20 per cent down are seen as a heightened default risk by their banks, they’re also faced with taking out CMHC insurance to cover the bank’s possible losses. To determine what the additional insurance-incurred cost would be on your mortgage, the CMHC offers a very handy calculator that bases your possible premium on your down payment amount and amortization length.
For example, let’s say you’re buying a home with the Ontario average MLS resale price of $386,900, and you go with a 25-year amortization period. By paying 5 per cent down ($19,345), you’ll be looking at an additional insurance premium of $10,107. Ouch!
Those who’d put down 10 per cent ($38,690) will shell out an extra $6,964.20 over the course of their mortgage. At this point, those with deeper pockets may be wondering – why not slide under the wire with a 19 per cent down payment ($73,511), score this great rate, and chop down the amortization with a lump sum payment? Considering you’d still get smacked with a $5,484.30 premium for being in the high-risk group, let’s do some more math to find out if it’s worth it:
For Those Taking the High-Ratio Route:
Price of home: $386,900 – 19 per cent down payment ($73,511) = $313,389
Interest rate: 2.89 per cent
Factoring in the CMHC insurance premium, that leaves you with a mortgage total of $318,873 to pay off over 25 years.
Having run this number through RateSupermarket.ca’s Mortgage Calculator, we’re looking at monthly payments of $1,491 over the amortization. Factoring in a 15 per cent lump sum payment of $47,830 will take 5 years off that timeline – and will save you $43,091 in interest as a result. Not too shabby so far.
Now For Those in the Low-Risk Group:
Price of home: $386,900 – 20 per cent down payment ($77,380) = $309,520
Interest rate: 2.98 (today’s best Ontario mortgage rate for low risk)
With monthly payments over 25 years, you’re looking at $1,462 on a monthly basis (no insurance premium here, whoohoo!). A one-time 15 per cent lump sum ($46,428) will also knock 5 years off your amortization – and save $43,531 in interest.
So there you have it! While it might be tempting to go with a record low rate, there’s payoff in this case for sticking with your affordable risk group. Besides, if summers unpredictable rate swings taught us anything, it’s that all rates for all borrowers could very well follow suit. We’ll just have to wait and see!