Reviewing Scotia’s 2-Year Fixed

Scotiabank 2-year FixedScotiabank’s 2.49% two-year fixed has been enticing borrowers since it launched three months ago.

It’s the country’s best 2-year term, priced 31 basis points below the average variable rate (competitive variables now average roughly 2.80%, or prime – 0.20%).

What’s more, Scotia guarantees your rate won’t rise for two full years, which many find attractive.

Some people, however, are taking this offer in hopes of riding out low rates for a year and a half, and then locking in to something longer. And therein lies a risk…

Scotia has sometimes allowed people to early renew up to six months in advance. That’s not guaranteed with this particular offer, but it’s possible the branch would consider it depending on rates and policies at the time.

Barring that, you can always find another lender to hold a rate for 120-180 days.

So let’s assume you take this 2-year deal and close in January, with hopes of locking into a longer term in 18-20 months before rates go up.

Rate-Lock

You’ll be able to lock in your renewal rate somewhere around July to September 2013.

By mid-2013, however, most authoritative sources (including the Bank of Canada and U.S. Federal Reserve) are calling for higher rates. We all know how error-prone rate forecasts are, but mid-2013 is as reasonable a guess as any.

That brings us to risk #1.

As a 2-year borrower, there’s a fair chance that rates will have risen 50 basis points or more by the time you’re able to secure your renewal rate. You’re clearly at the mercy of the bond market, which drives fixed mortgage rates.

Furthermore, the bond market anticipates rate hikes. That means yields will often rise one to two quarters ahead of central bank tightening.

Long story short, if central bankers and economists are correct, rates will have risen noticeably by the time today’s 2-year fixed mortgagors can secure their renewal rate.

Moreover, with today’s 4- and 5-year fixed rates just 1/2 to 3/4% above Scotia’s 2-year, it’s a big gamble (with low reward) to assume long-term rates will stay low until you’re ready to lock in. You’re saving 1/2% for two years, but 4- and 5-year mortgage rates could easily jump well over 1/2% in 18-20 months.

Timing-Mortgage-Interest-RatesHence, rather than using Scotia’s 2-year fixed to play the rate timing game (which is a hazardous game to play anyway), it’s better used as an alternative to today’s poorly priced variables.

In other words, if:

You’re well suited to a variable; and,

You believe the long-run advantage of variable and short terms will persist; and,

You think variable-rate discounts will improve in 18-20 months (a definite possibility)…

…then Scotia’s 2-year fixed is a decent tool for the job.


Sidebar: It must be noted that even variables at a cruddy rate of prime – 0.20% can potentially outperform this 2-year deal if rates fall before mid-2013. But the potential interest savings would be small.

A primary benefit of today’s variables is that they give you the option of locking in at any time without a penalty (if that’s your plan). With a 2-year fixed, you’re stuck for 18-20 months unless you pay a penalty to get out.

On the other hand, going variable and then locking in means your lender will potentially stick you with a subpar conversion rate. Conversion rates today are way above the best discounted rates.

As an example, if you get a variable at a Big 6 bank, you’ll often be quoted the “special offer” rate on conversion. “Special offer” rates are as high as 4.09% today, despite 3.19% being readily available through brokers. If you have a good relationship with a branch, you can often work them down a bit, but it takes some haggling. Either way, the conversion rate you get will still not match the rates you’d find on the street.


Rob McLister, CMT

  1. “By mid-2013, however, most authoritative source (including the Bank of Canada and U.S. Federal Reserve) are calling for higher rates. We all know how error-prone rate forecasts are, but mid-2013 is as reasonable a guess as any.”
    They were calling for rate hikes by now, untile they realized how crappy things still are. They have no clue past about 3 months anyway.

  2. I’d take a slightly less cynical tack than Traciatim. A year and a half should be enough time to right the ship in Europe and put some legs under the economy. The Bank of Canada has been warning Canadians to prepare for higher rates and it’s probably good advice.
    The economy is temporarily caught in the trough of a big cycle. Assuming things will stay “crappy” is not realistic.

  3. One item not mentioned here is that Scotia allows you to split the mortgage into 3 by way of the Scotia Total Equity Plan.
    I lucked out and locked into a 5-year variable at p-0.85% days before all the variable discounts started to disappear. I have now locked the other half into the 2.49% 2-year and paid off the other mortgage I had that was a variable at prime…
    In 18-24 months, I now have the option of splitting that mortgage into 2 pieces which will give me a lot more options, depending on where rates are at that time.

  4. Variable discounts will definitely improve. Just give it time. Banks would love people to think that prime rate is normal for a variable but that’s total BS. I predict prime-.5% will be widely available once the PIGS across the Atlantic straighten out their finances.

  5. Economy can’t get better when there’s so much debt to pay and all governments are saying they (people) will start seriously paying it …
    The hole of debt is huge and nothing is going to be way better soon (5-10 years).
    Time will show who’s right :)

  6. What about US ? are their finances better than the ones across the Atlantic :)
    Some people forgot who started and caused the crisis globally.
    Recently in the news no one says a word how the US debt increases and they don’t do anything about it.

  7. WEll this is true as long as you have 20% equity in your home, otherwise you cannot qualify for the Scotia Total Equity Plan.

  8. You can still split an insured mortgage. They register it a a collateral charge so it is non transferable.
    Note all Scotia mortgages are non assumable whether in a STEP or not and they charge an extra $500 fee is you pay out in the first year.

  9. Actually, there’s one more circumstance in which the 2yr rate is a good option: paying down the mortgage heavily during the two year period. Then no matter what rates do, the remaining principal to be mortgaged is a known amount. (And, for me, just missed refinancing as variables dissolved…)

  10. The two year fixed from Scotia is nothing more than a sales ploy to intice new clients. However if those clients are not getting solid advice from a Mortgage Broker(Agent) they don’t see what Scotia is really doing. They intice you with short term savings now, while betting that they dump you out on the other end of this agreement in a market that looks much different than it does now. Clients who want fixed rates are better off getting 4-5 terms like the article states.
    http://www.aaamortgages.wordpress.com

  11. I agree most rates and advertising are enticements to gain new (or retain) clients. ;=}
    I’ve bet that they won’t be “dumping” me into a much different market. And, I hate the IRD and longer terms a whole bunch, so shorter works better for me (just now–I reserve the right to change my mind later too!).

  12. Mike, you’re right that the Scotia Total Equity plan can be used for insured mortgages (as long as there are no HELOC components). But your comment about Scotia mortgages being non-assumable is incorrect…all of their mortgages are completely assumable. As well, I believe the admin fee for the first year is $200, not $500.

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