The No Frills Mortgage - New From Merix

Why pay for something you don't use?  That's the idea behind Merix's new "No Frills Mortgage."

The No Frills is a product designed for people who know they'll never take advantage of pre-payment privileges, and would rather have a lower rate instead.

Before we get into the details, however, first a few general comments...

No frills mortgages have been around for a while, but always as private labeled products.  For example, Mortgage Alliance launched one last fall (backed by Macquarie) and Reactive Mortgages has offered one backed by INALCO.

It's a smart concept from a marketing standpoint, and Merix is brilliant for being first to offer this product to the industry as a whole.  As most of you know, borrowers are extremely rate sensitive these days.  Homeowners increasingly think of mortgages as commodities, despite facts to the contrary.  So when they see a rate 10 basis points below the market, their eyes open wide.

In some cases, bare bones mortgages serve as a lure to get clients in the door.  Once the client and lender/broker strike up a conversation the talk often changes to options and privileges, and those usually come with a cost.  Many clients interested in bare bones mortgages therefore end up walking out the door with a more fully-featured mortgage at a higher rate (no, this doesn't necessarily mean higher compensation for lenders/brokers).

In terms of stats, the numbers support bare bones products.  Merix cites statistics that only 33% of Canadians make lump sum prepayments, based on a recent CMHC study.  Accelerated payments are more prevalent, with 45% of Canadians making them.

OK.  Back to Merix. 

Here's a quick rundown on the new No Frills Mortgage:

• The product is designed for:
• First time homebuyers with limited ability to prepay
• People who want a readvanceable mortgage with a low-rate fixed portion that won't be prepaid
• Property investors who don't care about pre-payments given their deductible interest and cash flow needs
• The rate:  5.19% (as of today)
• No lump sum prepayments without penalty (3-months interest or interest rate differential, plus 0.25% of original mortgage amount times the number of months remaining in term)
• 10% annual payment increases are allowed (on the mortgage anniversary)
• Accelerated weekly or accelerated bi-weekly payments are allowed
• 30-day rate hold maximum
• No pre-approvals
• 95% loan-to-value maximum
• Up to 40-year amortizations
• The interest rate, term, and possibly insurance premiums can be ported without penalty to a new No Frills Mortgage on a new property

Now that this product is out there you might see a lot of 5.19% fixed rates pop up on brokers' websites.  If you're a typical homeowner that cares about pre-payments (we hope you do!), make sure to ask your mortgage planner if his or her rate quote includes pre-payment privileges.

If you don't care about pre-payment privileges (we won't scold you if you don't), then Merix's No Frills Mortgage might be right up your alley.

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Side Bar: 

There is a real reason behind this product's lower interest rate.  Mortgages are typically purchased by investors.  Investors don't like uncertainty.  Therefore they don't like the possibility of borrowers pre-paying their mortgages and reducing the investor's income stream as interest rates fall.  As such, investors need a hedge against the probability that people will pay down their mortgages early. 

In addition, lenders hedge to lock in rates before closing. 

There is a cost to all this, and that cost is reduced or eliminated with a no frills mortgage.  Hence, lower rates to the consumer.

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Side Bar II: 

According to one source...

• A 30 day rate commitment may have a 65% probability of closing and an average closing period of 20 days.
• A 45 day rate commitment may have a 50% probability of closing and an average closing period of 35 days.
• A 120 day rate commitment may have a 40% probability of closing and an average closing period of 52 days.

Each of the above has it's own cost that is built into the respective mortgage.

Comments

[Jim]

PC Financial has offered a no-frills (ie. no prepay privileges) for quite a while. Their "Basic Mortgage" shaves about 10 bps off the regular rate.

http://www.banking.pcfinancial.ca/a/rates/
theUnbeatableMortgageRate.page

[Canadian Mortgage]

Hi Jim,

Thanks for the post. You're absolutely right. There might be one or two other no-frills products out there as well.

The difference is that PC's "Basic Mortgage" still has a 120 day rate hold period. That causes its interest rate to be higher than Merix's No Frills, for example.

Also, unlike Merix, PC mortgages unavailable to most broker houses, with a few exceptions.

Cheers,
Rob