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.
Last modified: April 29, 2014
average Canadian mortgage of $127,000
really? this is hard to believe.. considering i’m looking at putting ~50% (five-oh) down and my mortgage would still be higher than 127K.. would you mind providing information (link perhaps) that supports this information?
ms – You are probably thinking of first time home buyers. If you consider people in thier 40’s, 50’s and 60’s, their mortgages are close to $0.
ms – donny is right. And it’s not just first time home-buyers. The figure includes those who’ve been in their homes for 15 years. They still have a mortgage too.
There is nothing wrong with Walmart pricing as mentioned here. Instead of an anecdotal article it would be good to mention the lenders you are referring too, as being the walmart pricers.
I put 25% down and paid 15% annually and now I’m below $125,000 + I’m under 30. No big deal is it? So figures are right, I’m hoping to have 0 mortgage within next 3-5 years. I wish eveybody to be mortgage free…
Good stuff. I find Melanie to be really cute… I hope she’s bob’s sister …<3
Hi All,
MS: Please see this link from CAAMP. It has stats on average equity and you can back out the average mortgage from it: Link
Donny B & Diane: Thanks for the posts. Right you are.
Ribbet: This article isn’t meant to suggest the practice is negative. On the contrary, it’s good marketing and who’s going to complain about saving an extra basis point??
It was more of a commentary on mortgage pricing psychology and the minuscule impact one basis point has on borrowers. A lot of lenders price this way so the specific lenders doing it today are somewhat irrelevant. (Not to mention we’d rather not overtly analogize specific lenders to “buffalo”)…LOL
Cheers,
Rob
Flames Fan,
LOL. Fortunately I beat you to her by four years.
Rob =)
With the new Ontario provincial sales tax harmonization to the GST, I wonder how many more homes are going to be priced right at $399999 in Ontario.
Not only is there the psychological aspect to it, but also the real world tax increase at above $400000.
Banks lowered the rates today, where are the updates people, what’s the best rate now?
3.75 @ Scotia
Where at scotia? Usually scotia branches are tight with rates.
Scotia doesn’t have that much discretion. I could see maybe 3.95% max.