Mortgage deals are going, going, but not gone: Why it may not be time to lock in just yet
Banks have started shaving the discount available on variable rate mortgages, but that doesn’t mean it’s time to lock in your mortgage just yet.
Royal Bank of Canada raised rates across the board last week and part of the shift included a drop in the discounting of its variable mortgage tied to the prime lending rate, which generally tracks the Bank of Canada’s overnight rate.
What it means is that instead of rates as low as 2.2 per cent, based on a 50-basis-point discount that some banks were giving last year, new customers who opt for a floating-rate product will get a 10-basis-point discount off the current prime rate of 2.7 per cent, which translates to a 2.6 per cent rate.
To be clear, by historical standards, these rates are still incredibly low. The option to lock in your rate also remains on the table, as it should, considering that even after a 10-basis-point increase, the five-year closed fixed-rate at RBC is 3.04 per cent.
“We kind of chuckled when they raised rates because we have some lenders dropping rates, said Vince Gaetano, principal broker and owner of MonsterMortgage.ca, adding that there are lenders working through mortgage brokers still offering a 50-basis-point cut off prime for a variable product.
Gaetano maintains that the banks make less money on variable-rate mortgages compared to people locking in their loans, adding that of the 50 basis points in cuts from the Bank of Canada last year, only 30 basis points have been passed on to the consumer.
“The big banks are trying to move people out of the variable (and get them to lock in),” he said.
Based on several decades of research, variable-rate consumers generally save more money compared to those who lock in, with the downside being that they give up the security of a guaranteed rate for the period of their contract — a key consideration in a rising rate environment.
But this time around, with discounts shrinking, there is something further to consider: If you have a discounted variable-rate mortgage — older products shaved as much as 50 to 80 basis points off prime, Gaetano said — you are giving up a product not even available today.
If the overnight lending rate potentially heads lower, those consumers could benefit from banks lowering their prime rate. But, no matter what, they’ll be keeping their huge discounts.
David Madani, Canada economist with Capital Economics, suggested Friday he thinks it’s possible the Bank of Canada will have a surprise rate cut this month. He doesn’t think any of the reduction will be passed on to consumers — a stance the banks initially took in 2015 before relenting and handing over 60 per cent of the rate reductions from the Bank of Canada.
One reason for the higher interest rates has been the increased costs to the banks from new rules, including higher capital requirements and increased fees from Canada Mortgage and Housing Corp. for securitizing loans.
David Stafford, head of Bank of Nova Scotia’s real estate lending division, said increases in short-term lending rates drove Scotiabank’s decision to match RBC’s reduced discount on variable.
“The spreads were narrowing and that causes us to raise rates,” he said.
Stafford said there are still enough savings going on with variable that he expects some consumers to continue to opt in that direction — usually it’s about 35 per cent of the market.
“It’s all about the math,” said Stafford, adding that the costs of breaking needs to be measured against what savings you’ll garner. “The whole question about fixed versus variable is an advice conversation and it depends on your personal situation.”
A variable rate mortgage has the advantage of being broken by just paying three months interest.
Calum Ross, a Toronto mortgage broker, said the temptation to lock in now is strong and for most people, who can’t be bothered to stay up to date on interest rates, it makes sense.
The one exception might be those people with “artificially” low rates from deals negotiated when the banks were heavily discounted.
“Keep it if you feel comfortable,” said Ross, adding the caveat that anyone with a variable-rate mortgage needs to be able to afford an increase in rates if that happens too.
Published by Financial Post on January 11, 2016