Mortgage Rates & Mortgage Broker News in Canada

The Sting of Bank Penalties

Lenders like to keep you in their web as long as possible. If you’ve got a closed mortgage and try to escape, they sink their penalty fangs deep in your wallet.

To the surprise of many, there are dramatic differences in how those penalties are calculated, even at the same bank.

CIBC, for example, sells mortgages under multiple brands, with “CIBC” and “FirstLine” being the most popular.

Recently, we did an interest rate differential (IRD) penalty calculation for a FirstLine customer who wanted to refinance. This client was fortunate to have closed his mortgage at FirstLine instead of directly with CIBC.

RRSP Loans vs Cash Back Mortgages

The deadline for making a 2011 RRSP contribution is February 29, 2012.

Making that contribution can save you anywhere from hundreds in taxes to over $10,000 depending on your province and tax bracket. Plus, you’ll enjoy the tax-deferred long-term growth of that investment while it sits in your RRSP.

The challenge for some, however, is not having enough money to make an RRSP contribution. According to Investors Group, 58% of those not investing in an RRSP say it’s because they don’t have the funds.

One possible solution if you’re cash strapped is an RRSP loan. Another is a cash back mortgage. We examine the pros and cons of each here…

The Tradeoff With Big Prepayment Privileges

Most decent mortgages come with at least 10% lump-sum prepayment privileges.

Since the average mortgage is about $151,000, that means the typical borrower can prepay at least $15,000 per year in lump sum(s) with no penalty.

The thing is, most Canadians don’t come close to paying 10% extra on their mortgage over the course of a year. In fact, only 17% of mortgage holders made any lump-sum prepayments at all in 2011. Those who did likely prepaid an average of ~7.8% of their mortgage balance over the course of the year.¹

It’s therefore safe to say that most people will never max out their prepayment privileges.

10-Year Terms: More Taste, Less Filling

With the recent dip in long-term funding costs, lenders are finally sharpening their pencils on 10-year mortgage pricing.

Decade-long rates haven’t been this cheap in virtually forever.

Some brokers are quoting as low as 4.34% today, whereas most lenders were over 5% last quarter. (Not that long ago, 4.34% was considered good for even a 5-year rate, let alone a 10-year.)

With 10-year mortgages going “on sale”, we did some calculations to see how they stack up against the most popular term, the 5-year fixed.

A “Good Rate” is a Lower Rate for New Brokers

What’s a good rate? Depends whom you ask.

According to a recent Maritz poll, if you ask a new broker you’ll generally be quoted a lower rate than if you asked a veteran broker.

(Click to enlarge)

Maritz’s survey seems to show a clear link between the rate quoted and a broker’s years of experience. Newer brokers, for example, define “good rates” as being half a percentage point less than brokers who have been in the business 20+ years.

We asked industry experts Gary Siegle (Regional Manager, Invis), and Jim Murphy (President, Canadian Association of Accredited Mortgage Professionals) for their take on this data.

ING Direct Goes Collateral

“Collateral charge” is like a bad word to many consumers and mortgage professionals.

That’s why some were disappointed to hear today’s announcement by ING Direct Canada (ING) that all of its new mortgages will be registered as collateral charges.

The main rub with collateral charges is that it’s harder to switch lenders without paying legal fees. Collateral charges also impact people’s negotiating leverage at renewal and restrict borrowers from taking out second mortgages or HELOCs elsewhere (unless one’s property value skyrockets).

The upside, however, is that ING customers with collateral charges will now be able to refinance (with ING) without any legal costs.

Penalty Calculations—The Missing Pieces

When a Certified Financial Planner (CFP) can’t figure out how to calculate his mortgage penalty, it’s got to be really tough for Joe Borrower.

Globe & Mail columnist Ted Rechtshaffen, a CFP, recently wrote about this very topic. He says: “My mortgage breakage cost truly is a mystery…I have read my mortgage contract…It can’t be found in the fine print.”

Like many banks, his (TD Bank) explains how to calculate its penalty, but people have to deduce the numbers to plug into the formula themselves.

Globe: Variable Rates Are “So Over”

“For 10 years, I’ve said don’t waste your money on a fixed-rate mortgage. Today, I just cannot in good conscience put a borrower into a 3-per-cent variable when for the same rate I can put them in a four-year fixed.”

That’s mortgage planner Peter Majthenyi, as quoted in this recent piece by the Globe’s Rob Carrick.

Majthenyi is one of the most successful mortgage planners in the country, and (normally) a big variable-rate proponent.

When you get professionals like him calling it quits from variables (however temporary) you know there’s been a shift in planetary alignment.

The Unlikely Retirement Savings Strategy

One of the best risk-adjusted investments you can make requires no commissions, no buying and selling and no management fees.

According to a new study from the Certified General Accountants Association of Canada (CGAAC), the boring old mortgage prepayment performs better than most common retirement savings vehicles, including RRSPs.

Fixed/Variable Rate Scenario

Rate scenario spreadsheets are a handy tool in a mortgage planner’s tool chest. Advisors use them frequently to illustrate hypothetical cost differences between different mortgage options.

One common scenario is the 5-year fixed vs. 5-year variable comparison. We ran a showdown on these two terms when writing Monday’s story. (Click the chart below to enlarge it.)

The Incredibly Shrinking Variable Discount

Just weeks ago you could find variable-rate mortgages at prime – 0.80% (P-.80%) or better. Consumers thought they were here to stay, but the tables turned…fast.

Economic troubles and lender profit motives have shrunken variable discounts beyond expectations. Banks are now commonly quoting prime rate, for example, with little discounting.

Once the last few holdout lenders with P-.50% disappear, discounted variables could move towards P-.25%…or worse. Some lenders even suggest that prime or prime plus could be the new normal.

Meanwhile, aggressive brokers are selling five-year fixed rates at 3.25% or less. That’s an unusually low 50 basis point premium to a variable. A spread that tight doesn’t come around often, and it makes you rethink all of the research suggesting variables are the way to go.

The Fixed / Variable Conundrum

"To get anywhere, or even to live a long time, a person has to guess, and guess right, over and over again, without enough data for a logical answer." — Robert Heinlein

Mortgage rates are doing things that few people expected one year ago. Variable discounts have been sliced in half and those cunning banks are persuading us to pay disproportionately high fixed rates despite near-record-low funding costs.

Looking forward...

Some say rates have only one way to go from here (up).
Some say rates will stay flat for two years.
Some say rates will drop again soon.

Mortgage shoppers trying to pick a term might find all this uncertainty paralyzing. So what do you do when you don’t know what to do? You take your best educated guess.

There is never enough data to make perfectly optimal mortgage decisions. You'd need a really powerful time machine for that. But understanding the true risks of each term can improve your lot substantially.

On that note, we've compiled a fairly comprehensive list of pro-variable-rate and pro-fixed-rate arguments below. At the very bottom, we try to boil it all down.

Fixed, Variable, or Both?

Who can be blamed for thinking mortgage rates will stay in the basement for the foreseeable future? We’re witnessing:

• Surprisingly low U.S. job growth
• A contracting Canadian economy
• A U.S. Fed that’s pledging to remain on hold till 2013, thereby limiting the Bank of Canada’s options.

That has many wondering why on earth anyone would take a fixed mortgage rate.

A Few Misconceptions

Misconceptions occur in every business and the mortgage business is no different.

A recent example is this post by Boomer & Echo (B&E), a prominent blog that we typically enjoy. In it, B&E opines on why not to use a mortgage broker.

In the piece, the author gets some stuff wrong. As often happens, we came across it in our weekly blog scan and feel obliged to offer some counterpoints.

B&E makes four claims. They are:

An Interest-Saving Meal Plan

47% of Canadians say eating out less would help them save more.¹

Sounds logical. Frequent diners can drop $100+ a pop at a decent restaurant.

But what if that same $100 was redeployed, once a month, as a mortgage prepayment?

Today’s “Value Zone”

It’s been three weeks since the twin debt crises in the U.S. and Europe started hammering bond yields lower.

The Big 6 banks have still not passed along this cost savings by lowering advertised rates. (Lenders' cost of funding fixed-rate mortgages typically drops as bond yields drop.)

Behind the scenes, however, discretionary fixed rates continue to fall. If you’re well-qualified and shopping around, you’ll find full-featured mortgage rates at or under:

3.49% for a 5-year fixed

3.00% for a 4-year fixed

2.80% for a 3-year fixed

2.60% for a 2-year fixed

2.59% for a 1-year fixed

2.15% for a 5-year variable

For a financially secure borrower who doesn’t plan to break his/her mortgage within 4-5 years, two terms are now in the value zone (i.e. they have the lowest implied interest cost):

Neglect Not Thy Cost of Borrowing

That’s the first commandment when comparing mortgages.

We get several calls and emails a day asking something like: “Who has the lowest rate?”

Rarely do we hear folks ask: “Who has the lowest total cost of borrowing?”

There’s a big difference between the two. The interest rate is just one of multiple factors that determines your total cost of borrowing over the term.

There’s so much in the fine print that can turn a low rate into an expensive rate, including but not limited to:

IRD Shock

Banks are widely expected to pass along their recent drop in funding cost to borrowers. That should take the form of lower fixed mortgage rates.

Once that happens, some folks will face much larger penalties for breaking their mortgage early.

Generally, as fixed rates drop, interest rate differential (IRD) penalties grow bigger.

Mailbag: RRSP First-time Buyer Exceptions

Question:  I heard that I'm not considered a first-time buyer for the RRSP Home Buyers' Plan (HBP) if me or my spouse have owned a house in the past five years. Are there any exceptions to this rule?

Answer:  Yes. You can still qualify as a first-time buyer under the Home Buyer's Plan if...

The Relevance (or Irrelevance) of Mortgage Rate Expectations

61% of Canadians expect higher interest rates one year from now. 24% believe rates will stay the same.

These stats are from a recent 1,000-person CIBC-Harris/Decima survey.

Respondents were also asked: If you had to choose between a fixed or variable-rate mortgage today, which would you select? Their answers: