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.
We're hearing that reverse mortgage company Seniors Money Canada has suspended new originations. A source in the company says the Australian bank that backs Seniors Money has been hard hit in the subprime fiasco and has curtailed its funding. Seniors Money is supposedly on the hunt for a new domestic funder. 
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