RBC Lowers The Ceiling On Its Capped Variable

capped-variable RBC has significantly reduced the maximum possible rate on its RateCapper mortgage.

The cap is now set at 4.875%. That’s down almost a point since our last review of the product in May (see: RBC RateCapper Mortgage). It’s also one of the lowest maximum rates we can remember on a capped variable mortgage.

If you’re not familiar with this product, the RateCapper is a variable-rate mortgage that limits your risk if prime rate soars. If you were closing today, you’d get a starting rate of prime (2.50%) and the highest your rate would ever go is 4.875%.

A 4.875% cap makes the RateCapper far more appealing to its target clientele—which is, people who fear a large and sustained rate increase, but who also want a low rate in the interim. 

But is it appealing enough? 

After running some amortization simulations we’re left with the conclusion that a deep discounted variable (like prime – 0.60%) is still superior. This example shows the numbers and our assumptions

Our normal model factors in a 250 basis point increase in prime rate over the next couple of years (based on what most major analysts are projecting). For this analysis, however, we’ve assumed a 300 basis point hike (i.e., a 5.50% prime rate by year-end 2011, with flat rates thereafter). 

Based on those assumptions, the regular discounted variable is still less expensive over five years.

If you are still interested in the RateCapper, make sure to have your mortgage advisor run an amortization comparison of the alternatives. It might also serve you well to check out a 3-year fixed.  If you anticipate a moderately large increase in rates, a 3.49% three-year stacks up nicely with the RateCapper.

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