One of the first (and most asked) questions I hear is, “What is today’s best rate?”. The answer truly isn’t that simple. Why?
Today I’m going to focus on “A” Lenders and assume you have average to excellent credit. Given that scenario, the rates offered by different Lenders range based on:
- HOW FAST YOUR POSSESSION DATE IS:
Often, there are rate promos available for mortgage applications that only need a rate hold for 45 or 90 days. This is because the standard rate hold is 120 days and a lot can happen in those 120 days. To mitigate the risk that rates could go up, the further out your possession, the higher the rate.
- “NO FRILLS” MORTGAGE PRODUCTS:
Sometimes, options are available where you can sign on at a lower rate but lose the option to port your mortgage. Alternatively, there are even mortgages available where in exchange for your lower rate, you can’t refinance or change your mortgage in any way during your term due to a “sale only” clause (meaning the only way to break your mortgage is to sell your house). Some of these “sale only” mortgages may allow for a refinance into a similar product with the same Lender however, as the only alternative is to sell your home, the Lender may not provide favourable terms or rates on the new mortgage.
- DIFFERENT PENALTY CALCULATIONS:
A few Lenders offer lower rates and will allow you to keep all pre-payment and porting privileges BUT will charge a whopping 2.75% penalty to break. One way to view this is if you purchased a home with 5% down, after paying your CMHC fee, legal costs, and Realtor fees, if you need to sell or refinance within the first five years, that penalty will have eaten up any equity you may have gained if your house maintains it’s value over the time you own it!
AND the differences in penalties may continue even if you have the same rate without any specials. This is because for a standard 5-year fixed rate mortgage, the penalty is either three month’s interest or an Interest Rate Differential (IRD) calculation. The IRD is almost always higher.
The IRD is calculated by multiplying “the difference in percentage between your initial rate and the rate when you break your mortgage” TIMES “the loan amount outstanding” TIMES “the number of months you’re breaking your contract early”. Straight forward, right?
The rate you initially get when you lock into a mortgage is usually a “discounted rate” BUT when you get that same “discount” from one of the Big 5 Banks, the Bank will add that “discount” back in when calculating the IRD, thereby increasing your penalty by as much as three or four times that of a Monoline (ie. a Lender option you can only have through a Mortgage Broker).
To help you better visualize:
At the end of the day, how much difference does saving that 0.05% to 0.10% on a 5-year fixed rate really get you? Here’s an example:
On a 5-year fixed rate of 2.59% for a $300,000 mortgage, your monthly payment amount is $1,357.38 and at the end of 5 years, you still owe $254,372.59.
On a 5-year fixed rate of 2.54% for a $300,000 mortgage, your monthly payment amount is $1,349.88 and at the end of 5 years, you still owe $254,118.16. That’s a “savings” of $7.50/month or $254.43 over the course of 5 years.
On a 5-year fixed rate of 2.49% for a $300,000 mortgage, your monthly payment amount is $1,342.41 and at the end of 5 years, you still owe $253,862.38. That’s a “savings” of $14.97/month or $510.21 over the course of 5 years.
Are the above “savings” worth the cost of potentially paying 3X (or more) in penalties if an unexpected life change forces you to break your mortgage early to move or refinance? At the end of the day, it’s your choice but make sure the WHOLE picture is explained to you before you decide.
Your mortgage options can have a lot of hidden terms and are constantly changing. This is why having a trusted Mortgage Broker can help you save time and money. If you have any questions about your mortgage or know anyone who can use my assistance, please call me any time at 780-863-0700.