Scotiabank’s Ultimate Variable Rate Mortgage

Scotiabank-Ultimate-Variable-Rate-MortgageVariable-rate mortgage volumes have dropped off a cliff since last summer.

Most feel that variable rates simply aren’t low enough (compared to fixed rates) to offset the risk.

But what if there was a limit to that risk?

That’s Scotiabank’s proposition with its recently re-introduced Ultimate Variable Rate Mortgage (UVRM).

The UVRM gives you a starting rate of prime (3.00% today) and your rate is guaranteed never to exceed the “cap” rate. The cap rate equals Scotia’s 3-year posted rate at the time of origination.

Essentially, the UVRM makes you give up 15-25 basis points of discount compared to regular variable mortgages today. In return, you get assurance that your rate won’t increase more than 99 basis points (based on today’s cap).

The Ultimate Variable has a 3-year term. Its payments are calculated using the cap rate and they don’t change for the full length of the mortgage. If rates go up, you simply pay more interest and less principal—and vice versa.

David-StaffordSetting the payments to the higher cap rate lets you “significantly accelerate the mortgage repayment now, using [today’s] low rates to your advantage,” says David Stafford, Managing Director, Real Estate Secured Lending at Scotiabank.

“We don’t predict rates,” Stafford notes, “but if you think prime will stay low, or even decline over the next three years, then the UVRM is a great way to save money, accelerate repayment (because the payment is based on the cap), and it provides protection if rates do go the other way.”

The UVRM versus a Regular Variable

If you do choose this product, there are four scenarios that could unfold over the next three years:

  1. Prime rate falls
  2. Prime rate stays the same
  3. Prime rate rises 25-125 basis points
  4. Prime rate rises more than 125 bps

Scotiabank-MortgagesCompared to a regular deep-discount variable, the only way you save with the UVRM is if scenario #4 materializes.

In that case, the regular variable rate would climb to 4.25% or greater while the UVRM stays capped at 3.99% (based on today’s cap rate).

If you believe there’s an appreciable chance of prime rate rising more than 125 bps in three years, but you prefer a variable anyway, then the UVRM is for you.

Of course, if you’re sufficiently worried about a 1.50+ percentage point rate increase, you’re probably better off in a fixed rate. You can get an equivalent-term fixed rate today for 2.89% or lower, with zero upside rate risk for three years.

Other features of the UVRM include:

  • Convertibility to a 3-, 4-, 5-, 7- or 10-year fixed mortgage at any time
  • Optional 15% lump-sum prepayments
  • Optional 15% annual payment increases
  • A 90-day rate hold
  • A 3-month interest penalty for early termination
  • Match-a-Payment/Miss-a-Payment.

The Ultimate Variable Rate Mortgage is available through brokers, Scotiabank branches and Scotiabank mortgage specialists.

 


 

Sidebar:  Scotiabank is trying to get the word out about its “Mortgage-Free Faster” campaign which advocates making small changes to shorten your amortization.

To that end, Stafford says, “If you believe…rates are at or near the bottom, and not sustainable for the life of your mortgage, then you should make a payment that’s more reflective of historical rates.” Doing so helps you “avoid sticker shock if rates are higher when [your] next renewal comes up.”

“An extra dollar paid at the beginning is a dollar you’re not going to pay interest on for the next 30 years…The trick is to use [today’s] historical low rates to accelerate repayment. We may never have an opportunity like this again,” he noted.

“But even if rates do stay low, it’s not unreasonable to think you could be mortgage-free in 15 years (by) making a payment that our parents could only have dreamed of in 1981.”

 


 

Rob McLister, CMT

  1. Good write-up Rob. Personally I think the chances of people benefiting from the cap are low. Rates would have to jump 1.50% early in the mortgage, which seems unlikely. Maybe that’s why Scotia sells this product?

  2. This product is sure an odd duck. A mortgage with a 30 year amortization but a payment based on a rate higher than the interest rate isn’t really a 30 year mortgage, is it?
    I don’t think prepaying a 3% mortgage is the optimal move unless the family has no unused TFSA or RRSP contribution room.
    Weren’t we just discussing whether a fixed 5 or a fixed 10 was the best choice? Who wants to renew in three years?

  3. “I don’t think prepaying a 3% mortgage is the optimal move…..”
    Why not? Where else are you going to get a 3% after-tax return with no risk?

  4. “…no risk?”
    …Ha Ha. that’s a good one
    (Sarcasm off now)
    You think the house is a AAA asset? Really?

  5. Where else are you going to get a 3% after-tax return with no risk?
    This is the wrong question. The right question is “At a level of risk appropriate to your income, assets and age, what can you earn, after tax, and how can you reduce or defer as much tax as possible?” Paying down a 3% mortgage with after tax dollars is unlikely to be the answer for most people.

  6. “You think the house is a AAA asset? Really?”
    That is irrelevant. If you have a mortgage you have to pay that mortgage regardless.

  7. Accelerated mortgage payments are definitely the answer for people who need one of the highest guaranteed returns possible.

  8. Again: Why guaranteed? Are we talking about 68 year olds with small portfolios here? It isn’t too hard to put together a diversified portfolio yielding 5-7%, either tax free (TFSA), or tax deferred even on the capital (RRSP). Even outside those shelters, the dividends are tax advantaged. So why settle for less than one percent above inflation? Nobody ever got rich that way.
    Let’s look at another way. Why would a bank be encouraging its customers to prepay their mortgages?

  9. There are 3 problems with what you are saying.
    1- Those 5-7% returns you speak of are not even close to risk-free.
    2- That 5-7% is not an after-tax return unless you have TFSA room.
    3- It’s not so easy to choose good stocks. Maybe you’d be kind enough to share your “not too hard”-to-find picks with us?

  10. Those 5-7% returns you speak of are not even close to risk-free.
    Individually, the stocks are high quality. A portfolio of 15-20 of them mitigates risk considerably.
    That 5-7% is not an after-tax return unless you have TFSA room.
    Or RRSP room. The bank isn’t saying “Paying down your mortgage is a good idea after you’ve maxed out your registered plan contributions and paid off all higher APR debt.”
    It’s not so easy to choose good stocks. Maybe you’d be kind enough to share
    Nope, but the Globe and Mail has a stock screener so you can look at just stocks with a healthy dividend. Picking stocks and beating the market is not too easy, because in a good year the market can go up 20-30%, but that’s not the kind of portfolio we’re talking about here, just one that pays nice dividends.
    I’ll freely admit that a 3% after tax yield is a good yield right now for a risk free strategy, but I’d question that a risk free strategy is appropriate for somebody young enough to give a mortgage in the first place. The central banks and inflation ensure that a risk free strategy is reward free as well, and don’t these homeowners need diversification?

  11. Great scenario analysis. Seems like a bit of a dud product to me. Maybe they will confuse some consumers and get some volume.

  12. If you have a guaranteed liability, the first best use of your saving dollar is to pay down that liability. Efficient markets hypothesis holds that all risk adjusted returns are equivalent: your 5% return with dividend stocks are, after adjusting for volatility, the same as a guaranteed 1% on a 3-year t-bill.
    Paying the mortgage is one better, because you earn 3% on that money, tax free.
    Answer me this: do you think that a 30 year old should be buying stocks on margin? If you have a mortgage and an equity portfolio, then that is exactly what you are doing. It’s probably more risk than people think that they are taking on. It’s nuts.

  13. If you have a guaranteed liability, the first best use of your saving dollar is to pay down that liability.
    Surely this depends on the interest rate of the liability and what else you can invest in.
    do you think that a 30 year old should be buying stocks on margin?
    Abso-freakin-lutely! Money has never been so cheap, and likely never will be again. If the world is going to end, it doesn’t matter whether you repay, and if it doesn’t, you get great assets yielding almost double what it costs to borrow.

  14. It’s pretty scary to be relying on their numbers to buy mortgage leads but then again, that’s how they do their business for the longest time now. The only assurance one can get out of this is if there are any security measures tied up to some loan packages that they offer.

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