If you walk down any aisle at Walmart you’ll see a lot of products priced at $4.99, $9.99, $19.99, and so on. When it comes to choosing between purchases, people instinctively gravitate to prices with lower leading digits.
Not surprisingly, it’s no different in the mortgage world. At the moment, for example, there’s no shortage of 5-year fixed rates at 3.99%. Lots of non-bank lenders now seem to be congregating there, like a herd of buffalo waiting for the next buffalo to run.
There’s no magic to 3.99%. It’s not based on any specific cost of funds formula. It’s simply a number that makes people say “Wow, under 4% for a 5-year mortgage sounds great!”
As such, don’t expect to see a lot of 4.00% mortgage offers out there. If you do see another mortgage that’s 0.01%-0.02% more expensive, forget the psychology. Compare that mortgage’s features with the alternatives. A 0.01% discount saves the average borrower just $60.58 over five years (given the average Canadian mortgage of $127,000, a 25-year amortization, etc.). Yet, feature differences or little quirks in pre-payments, penalty calculation, fees, rate holds, etc. can cost you FAR FAR more. In the mortgage business, looking at the forest instead of the trees can be quite fruitful indeed.
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