You may have heard that rates are changing, and that is true. They don’t call it war for nothing and you need an expert by your side!
Think of mortgage brokers as your loyal soldiers. What we are seeing is exactly what we anticipated when prime rate goes up and discounts go down. Confused? Don’t be, variable rates are based on prime and both Bank of Canada Prime and Bank Prime are different.
What the new discount means is what it means – they anticipate prime to go up higher.
With current regulations, borrowers qualify for more mortgages on a variable rates! This is a shift from the previous policy where more Canadians were having to take fixed rates to qualify for the most.
These new discounts on new mortgages getting taken out there discount is lower off of the bank’s prime rate- this does not apply to an existing mortgage.
Did you notice earlier I said the bank’s prime rate, you would think they are all the same… right?
This is not the case. In November of 2016 one Canadian lender broke the trend of their counterparts and raised their internal prime to immediately impact their existing customers by adding to their amortization. This discount below was for new clients, they increased the discount so it looked bigger.
Example
Lender who broke the trend prime Other lenders prime
3.65 % 3.45%
Discount 1.05 Discounts ranging from 1.00-.95%
It’s important to note – each lender has unique criteria to be met to get these offers: some only for purchases, some only with switches, some only certain amortizations, and some only certain property types. The list goes on!
Remember your broker shops all these lenders without bias, while protecting your credit score to assist you in finding the best one. It’s important that we evaluate the following criteria with these lenders- here is an example of three lenders:
Lender one
• Bank has a higher Prime than anyone else
• No change to payment
• Increases amortization which can put into effect a trigger clause- cash call in on mortgage or forced pre-payment and other costs such as appraisal at your expense
• Not portable
• Does have a 12 month penalty payback if getting a larger mortgage at new rates! Best one!
• Have to go to branch to lock in and then be subject to their IRD (usually 3-5% of balance pending where you are in your term).
• Based on history this lender is generally the first to raise their rates and last to decrease
Lender two
• Prime rate consistent with all lenders
• Change to payment so amortization doesn’t increase
• NO trigger clause
• Have to go to branch to lock in and face large IRD between 3-5%
• Not portable but will refund you within 6 months if the mortgage is larger and will get rate available at that time
Lender three
• Prime consistent with all lenders
• Change to payment so amortization doesn’t increase
• NO trigger clause
• lender will pay back penalty within 3 months of getting a larger mortgage with them
• your mortgage expert can assist you with lock in
• If you lock in they have the lowest penalties in the country to break your mortgage in the future, generally 1-1.5% of the balance
With seven-in-10 mortgages breaking before the term is over, this should be weighted very carefully.
Let me demonstrate the following:
A mortgage that gets locked in with first or second lender above at $500,000, by the third year the cost to break a mortgage will be between $15,000 and $25,000. With the third lender the cost would be between $5,000 and $7,500.
What to do with this info?
These new wars apply to new mortgages. If you have a mortgage with a discount less than .50, a renewal upcoming, looking at accessing your equity for home renovations or to consolidate debt and you have a variable rate, it may be time to run the numbers to see if taking a new variable rate mortgage is beneficial for you. One of the significant benefits of having a VRM is to get out at any time with only three months interest penalty (unless a restrictive product was taken for a better rate or had a sale only clause).
As you can see we have only scratched the surface in terms of the differences. There are many other differences and mainly you have to consider as a consumer, do you want to be calling a bank branch and play Russian roulette with the education level and sales goals of the person who guides you through deciding what to do with your biggest asset? Or would you rather have a mortgage professional who is in the front lines proactively guiding you and assessing the economic factors to give you personalized advice based on their experience and knowledge of the mortgage industry.
Depends on what you value most!
Do you have questions on how we can help you?
Angela Calla has been a licensed mortgage broker for 14 years. She has been with Dominion Lending Centres since its inception in January 2006. Residing in Port Moody, British Columbia, Angela is a regular expert guest on several news stations, television shows, radio programs and local and national publications. She was the AMP of the year in 2009, and has consistently been one of DLC and the industry’s top performers since 2006. She can be reached at callateam@dominionlending.ca or 604-802-3983.
