Home

Apply Now

Contact Us

Categories

Some homeowners with “rate envy” are refinancing

When you signed your mortgage a few years back, you were thrilled with the rate you had negotiated: possibly the lowest in your home-owning memory. That was then.

Who would have believed that mortgage rates would have continued that marvellous downward trend? Today, mortgage shoppers are looking at some of the lowest rates in history, and many homeowners with existing fixed-term mortgages are experiencing some “rate envy” about today’s rock-bottom mortgage rates.

It might be worth a conversation with a mortgage broker about your options. Typically, we think of a fixed term mortgage as a non-negotiable contract. And it’s true that there are financial penalties to re-negotiate. But in the past several months, many homeowners have been asking mortgage brokers for a mortgage analysis – a detailed look at the penalties versus the payoffs  -- to determine whether it’s worth refinancing.  Like many Canadian homeowners, you may find that refinancing makes sense.

Firstly, understand that you won’t reap immediate rewards when you refinance; it will take time to see the savings, since you’ll have some up-front penalties. So if you’re going to be selling the home in the next year, you’re unlikely to benefit from refinancing now. Your mortgage broker can help you to assess your “payback” period: the length of time required to see any savings, based on the penalties you will incur and the difference between your existing rate and your new one.

Speaking of penalties, what does it cost to get out of your existing mortgage?  Generally, you can expect to pay out the greater of either a) three months’ interest, or b) the interest-rate differential. The interest rate differential can be high; in effect, your mortgage lender will expect you to pay them the equivalent of what they will lose by releasing you from your mortgage and lending the money at current rates. If you are close to the end of your mortgage, these penalties may not be too severe, but if you are early in your mortgage arrangement, the cost can add up.

Don’t be put off by what looks like a big penalty: it’s only one factor in your analysis.

There are some exceptions to the “greater of” rule. If you have a high-ratio mortgage that dates back to 1999 or earlier, and is insured by CMHC (Canada Mortgage and Housing Corp.), you have the right to be released from your mortgage after the third anniversary by paying only the three-month’s interest – according to the rules in place at that time.

So is it worth it? Only your mortgage professional can tell you for sure, but many homeowners are experiencing significant savings – even with rate differentials of two points (or possibly more).

But it’s important to look at the long-term picture; despite the penalties, you may still see substantial savings on mortgage interest.  And, you should also understand that there are two approaches to refinancing: you can simply pay out the penalty on your existing mortgage and start fresh with a new mortgage, or you can opt for what is termed a “blend and extend.”

Begin with a visit to a mortgage broker, who has access to rate information from a broad selection of lending institutions – and who can provide you with the kind of detailed analysis you’ll need to assess your options.

Top

Fixed or variable-rate mortgage?

“Wow!” you say to your spouse as you hit the brakes on the car. “Did you see the mortgage rate those guys are advertising?” Your worries are over, you’re thinking.  Just lock in a rate like that for the next ten years, and you’ve got it made.

Not so fast. That rate may not be the one for you. Typically, the lowest available rate – and the one that makes the rate sign look great from the street – will be for a variable or adjustable-rate mortgage. That rate has the potential to be like a roller coaster. The posted variable or adjustable rate is the rate you’re getting today. Unless you have an economic Ouija board, you won’t be able to predict what kind of ups and downs are ahead of you.

Let’s take a closer look. A lender will offer different rates for different types of mortgages. The rates are determined based on financial risk – to the institution and to you. When a customer is willing to take on the risk, he/she is rewarded with a lower rate. If the lender is taking on the risk (that is, the customer is promised a particular rate… regardless of what happens in the future), the rate is higher. The longer the term, the higher the risk for the financial institution.

So how do you decide? Fixed-rate mortgages, because they require a low risk tolerance, are usually better suited to first-time buyers or those who haven’t owned a home for a very long period.  Ask yourself these questions: Do you like or need to know exactly what your payment is going to be over a longer period of time? Do you want to avoid the need to consistently watch rates? Do you have less than 25% down? If you answered “yes” to all, or most of these questions, a more conservative fixed-rate mortgage could be the better choice for you.

A variable or adjustable-rate mortgage is best suited to people who have a flexible budget and can tolerate higher risk. Ask yourself these questions: Do you watch market conditions? Can you handle any sudden rate increases that could increase your payment? Do you have 25% or more equity in your home? If you answered “yes” to all, or most of these questions, a variable or adjustable-rate mortgage might best suit your needs.

Some lenders offer a special promotional rate for the first few months of a variable-rate mortgage, which you should discuss with your mortgage broker. Also discuss what your rate will be based on – prime minus 0.5% or 0.6% or on Bankers’ Acceptances (BAs) plus 1%. The latter being a new kind of adjustable-rate mortgage that has recently been introduced to the marketplace. Most variable or adjustable mortgages allow you to exercise an option to “lock in” a fixed rate at any time for the remaining portion of your mortgage term or for a longer term.

If the uncertainty of a floating rate is going to give you sleepless nights, you’re in good company. Many Canadians prefer the certainty of a fixed-rate mortgage. They know exactly how much they will pay over the term of their mortgage, and they can plan accordingly… with no financial surprises. But if rates do drop… and drop… and drop… you are committed to the “promise” that you have made. Your best option - have a professional help you decide which option best meets your needs.

Top

Homeowners locking in some of the lowest rates in history

Variable rate mortgages… move over. The long-term mortgage is back.

For the past few years, Canadian homeowners shrugged off their traditional preference for security and embraced the cost-saving potential of variable or adjustable-rate mortgages. With a variable rate mortgage, the rate you pay is typically pegged to the bank’s prime rate – which has dropped steadily over the years and now stands at historic lows. The lower the rate goes, the more you can save.

But how low can it go? We’re seeing a turn of the tide now as Canadians conclude that the rate is unlikely to drop much further – making long-term mortgages look very attractive again. And homeowners are developing new enthusiasm for long-term mortgages: for some, the longer the better.

Let’s take a closer look at this change of heart.

The right mortgage, of course, always depends on other factors: including your personal financial situation and your risk

tolerance. Your mortgage broker’s job is to help you find the best value while managing risk. While a longer-term mortgage offers the security of knowing exactly what your rate will be for the term chosen, it does carry the risk that – if rates go lower – you will wind up paying more interest than you would have with a variable or adjustable rate mortgage. A variable rate mortgage demonstrates its rewards in an environment in which rates are dropping, but carries the risk that – if rates begin to move upward, you may wish that you had “locked in” a longer-term rate. So both choices theoretically carry some risk.

Homeowners with variable or adjustable-rate mortgages have done particularly well in the past few years – as rates dipped lower and lower. But because mortgage rates have been on a downward trend for so long, it’s easy to forget some of the historical trends. Between 1976 and 1981, for example, interest rates went from a “low” in the 11% range to highs in the 21% range. That was a doubling of rates in a period of only five years. It might seem shocking, but those who locked in at 11% were actually the lucky ones.

It’s a sobering thought. Homeowners who witnessed the mortgage market in those years became a generation of risk-averse buyers, and the preference for fixed-term mortgages dominated borrowing habits for almost twenty years. Then as rates kept up a steady pace downwards, the preference for longer-term mortgages faded. So why are they coming back in fashion?

While no one is predicting any 1981 scenario in mortgage rates in the next few years, you’re unlikely to find many experts who are predicting that rates will continue the long downward trend. There is some sense that we are close to the bottom. And with little downward room for rates, the so-called “risk” of the long-term mortgage is effectively eliminated. After all, you are unlikely to sign a 5-year mortgage today and then watch the rates drop 4% over that time.

Canadian homeowners have an historic opportunity to lock in some of the lowest rates in history. Some homeowners who locked in a very good rate a few years ago are even willing to pay an interest penalty to lock in a new longer-term mortgage at today’s rates.

There’s little guesswork today about how much lower rates can go; we’re talking maybe now about only fractions. So for very little risk (of lower rates), you can benefit from the traditional rewards of a longer-term mortgage: the security of knowing that – whatever happens to the rate environment – you can plan your payments until the end of your term.

Top

If mortgage rates can fall through the “floor” of the prime rate… what else is under the floor?

“Lower than prime,” you heard someone say. Like most Canadians, you were probably first sceptical and then confused. We tend to think of the prime lending rate as the invisible “floor” of lending rates. The very best customers can get very close to that floor. It is theoretically possible, we reason, to actually be ON the floor, but not possible to be below it.

Nevertheless, Canadian lenders offer mortgages at prime minus 0.5% to even minus 0.9%. So the floor isn’t the lowest you can go. There’s something under the “floor”.

The rate known as “Prime” has been the popular benchmark for lending in Canada. When business reporters talk about interest rate movement, they usually talk about what’s happening with prime. But there are other benchmarks in money rates, though they are typically for use by professional money managers. The most significant of these is the Banker’s Acceptance rate.

Any variable- or adjustable-rate mortgage is an excellent option when interest rates are either dropping or stable. Not surprisingly, they’ve been a very popular choice in the past few years. There are some rumblings now that rates may begin to increase, but flexible-rate mortgages still remain an excellent choice for those looking to save some interest.

As always, you should consult with a mortgage professional to find the mortgage that suits your personal financial needs. An independent mortgage broker can provide you with information on a broad range of mortgage options from a wide variety of lending institutions, so you can compare features and options at a glance. 

And remember, it’s worth taking some time to look beyond prime and explore what’s “under the floor” in mortgage options!

Top

Rates

Call Us Toll Free

866-544-4001

Follow us on

Mortgage Details