RMG’s New Low Rate Basic Mortgage

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.

RMG-MortgagesThese 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.

Bruno-Valko“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

  1. I would imagine that most young buyers upgrade within five years. It may be worth paying 10 bps more for the option of increasing without a penalty.

  2. Yes because these historically low interest rates are a real problem for Canadians ;). Or is it brokers that have the problem, with their core value to consumers. Or unwitting first time buyers gullible enough. If you can’t offer anything of value, lower your price.
    and for all those that are going to rage at this perspective, yes I know rate is important…but Canadians can get great rates everywhere, every bank credit union and lifeco… so low rates are a given, not a reason…and certainly not a business profession

  3. You may be anonymous but you’re also transparent.
    You either have an axe to grind or you simply don’t understand the benefit of choice when shopping for a mortgage. People don’t get choice at a “bank, credit union and lifeco.”
    Obviously it’s not all about rate. Then again, saving a tenth of a percent here and there adds up to a lot of money.
    Oh and one more thing. You can get great rates everywhere, but you can’t get the best rate everywhere.

  4. This mortgage could also be a financial death trap for a first time buyer. No intelligent person buys a house knowing or expecting they will run into financial difficulties. But “life” happens, seperation, divorce, death, job loss, income reduction, we all know the stories.
    As a first time-buyer with 5% down + high ratio insurance+3% pre-payment penalty, you are 100%+ mortgaged. There is no room for an organized exit strategy, no room to discount the sale price, pay real estate commissions, legals, & closing costs if the stuff of life hits the fan.
    Given the FSCO requirements for Ontario mortage brokers &agents to put borrowers into “suitable” mortgages I think any risk sensitive broker/agent would best take a along hard look at other lenders before putting a low equity first time borrower into this RMG product

  5. There are choices everywhere – even the big, bad banks. The RMG product is simply another option – not for everyone, but there is no one-size-fits-all.

  6. Just so I am clear: because “life happens” a risk sensitive mortgage broker advises a client AGAINST a low rate option.
    Don’t present the facts carefully and disclose all penalty elements of the mortgage and let the client decide on their own.
    Advise them NOT to do it, do NOT take the low rate, better to pay a higher rate like 3.04% and somehow even though the client is just slightly less underwater on their 3.04% mortgage than with RMG’s rate they will be better off.
    Yeah, I get it.

  7. Ron
    I agree if you are underwater it doesn’t matter if you drown in a pool or an ocean, the results are the same.
    However if an average mortgage in the GTA is $400k (ignoring compound interest and declining principal balance), 10 bps/ year saves your borrower less than $2,000 over the 5 year term, but puts that same borrower at risk of losing a minimum of $12,000 in a prepayment penalty. I don’t care what kind of waiver/ disclosure you have or what discussion you have with the borrower, the numbers prove the risk/reward is stacked against the borrower.
    In my opinion this is a product for those who sell rate without doing appropriate due diligence of the product they are placing their client in.The lender doesn’t care. You and you brokerage and your E&O are the ones that ultimately pay.
    As a matter of principal I don’t buy down rates except in the rarest of circumstances but I would rather buy down the 10bps, than sell this product to my clients.

  8. Are there any other fees or charges of any kind apart from appraisal fee associated with the RMB Basic rate basic mortgage? Also, from what I read from your post here, the only down side is the penalty at early breaking?
    Thank you.

  9. It’s not a bad mortgage but the company is horrendous to deal with and certainly does not appreciate or value its customers. Been with them for 8 years, want to make changes, and the cost is horrendous. Unless you are absoluetly certain you will never make changes or come into a rainy day, one is better to pay an extra .5% interest and deal with a company that believes in customer service and values their customers as a need for their business.

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