Interest rates are the #1 mortgage differentiator for the average consumer. To offer the lowest possible rates, lenders are often forced to delete features and flexibility.
These no frills (or low frills) mortgages, as they’re called, are often stripped down products. But last week, RMG Mortgages, a division of MCAP, launched a slightly new spin on the low-frills concept. It’s called the Low Rate Basic Mortgage and it’s got full prepayment privileges and a 90-day rate hold, plus a materially better rate.
But there are a few trade-offs.
One is the penalty. Its penalty is the greater of the interest rate differential or 3% of the outstanding balance.
For example, if you had a regular $100,000 discount mortgage at 2.99%, and you broke it one year early, you might pay a three-month interest penalty of $750 or less. By contrast, RMG’s penalty could be $3,000—other things equal.
Some may scoff at this, but street pricing on this mortgage will probably be ~10 basis points below the general discount market. That’s a $472 five-year savings for every $100,000 of principal. To some people, that savings will offset the product’s limitations.
“This mortgage is designed for people taking a 5-year rate with no plans to move or pay out the mortgage…” says Bruno Valko, Director, National Sales at RMG. “…It was designed mainly for the first-time home buyer.”
If you wanted the freedom to refinance elsewhere before maturity, this wouldn’t be the mortgage for you. But that’s less of an issue for the product’s target market.
“I think we can agree that people taking a 95% loan-to-value today have a slim chance of being able to benefit from an 80% LTV refinance within the first 5 years,” Valko says. That’s thanks to “a cooling housing market” combined with the government’s prohibition on refinancing insured mortgages with less than 20% equity.
There’s also less probability that the borrower will want to break the mortgage early to get a better rate. Valko suggests that, “…at 2.94% or 2.89% today for a 5-year fixed, the chances of rates sinking much below these rates (such that people would benefit from refinancing at a lower rate in the first five years) is very slim…”
All of this is true. And so this mortgage may indeed appeal to first-time buyers with no plans to refinance or upgrade their home within five years. But it will depend on how competitive RMG keeps its rate versus competing unrestricted mortgages.
Just keep in mind, people’s plans sometimes change. The one thing we wish this product had was the ability to increase and blend. The fact that it doesn’t means you’d have to pay a penalty to add more money to the mortgage (if you ported it to a more expensive property for example).
That said, if you do have to refinance early, and you do it with RMG, RMG may adjust the penalty so that it is “equal to a normal mortgage,” says Valko, who calls that “a very positive added feature.”
Here are the rest of the specs:
- Optional Annual Prepayments: Up to 20% total
- Optional Payment Increase: Up to 20% annually
- Rate Hold: 90-days
- Conventional Mortgages: Yes, with no premiums
- Min. Credit Score: 620-650 for primary applicant
- Portability: Yes
- Assumability: No
- Purchase/Refi + Improvements: Yes (optional)
- Pre-approvals: No
- Free switches: No (purchases & refis only)
- Max. Amortization: 30 years with 20%+ equity; otherwise 25 years
The company makes this aggressively discounted product available to all RMG-approved brokers.
Good for RMG for not limiting its availability (or cutting compensation) for non-status brokers.
Rob McLister, CMT