September 26, 2020

Of mortgages and interest rate differentials

January 19, 2012 – 8:15pm By ROGER TAYLOR Business Columnist
Record low mortgage rates are enticing many Canadians to rush to their banker to refinance.

Rates have been declining since the start of the new year, culminating a week ago when the Bank of Montreal lowered its five-year fixed-rate mortgage to the lowest posted rate by a major bank in Canadian history — 2.99 per cent.

That was closely followed by Toronto-Dominion Bank cutting its four-year fixed-rate mortgage to 2.99 per cent, available until Feb. 29.

The BMO offer ends Wednesday. It is based on a 25-year amortization period, and the annual lump-sum payment is limited to 10 per cent of the principal.

Mortgage broker Corey Regan says business was quiet just before the holidays, and after New Year’s Day “the gates just opened up.”

Strong demand for bonds offered by Canada’s banks on the international market is being credited for helping to push mortgage rates lower for regular folks.

With investors fearing a European economic crisis, Canada is viewed as a relatively secure place to put money. The low rates paid on Canadian bonds means the banks are borrowing money cheaply, therefore allowing them to compete for market share in mortgages by offering record low rates.

The mortgage refinance business right now is fairly complex because of “extremely large payout penalties,” says Regan.

The veteran mortgage broker says the lowest payout penalty he’s calculated recently was about $9,000.

“But, the good news is, these are 35- and 40-year mortgages that were locked in to the five per cent-5.6 per cent range. The (mortgagees are) actually going to be out ahead by refinancing — not by a huge amount.”

In one instance, he says, the refinancing penalty on a $280,000 mortgage was $16,000. With 30 months remaining on the term, the mortgagee is going to be saving just about $16,000 by refinancing “but they are going to have the peace of mind that they know for the next five years … they’re going to be at these rates,” says Regan.

While there are some banks offering slightly lower rates, he says the average five-year rate right now is 3.19 per cent.

“There has been some call for the 10-year because it is down around 3.89 per cent. It’s demographics; no one under 35 is asking about the 10-year. All us old fellas remember the 12 per cent, 13 per cent, and look at 10-years at under four per cent and say, ‘Yeah! I’ll take that.’.”

There have been some people looking for a mortgage to buy a home but the majority are simply looking to refinance, Regan says.

Determining the interest rate differential, which is necessary for calculating the penalty, is complicated, he admits. For instance, if the posted rate was 6.25 per cent and the mortgagee was able to negotiate 5.25 per cent, the differential is calculated by subtracting the lower refinance rate from the higher posted rate on the original mortgage.

“The main problem with interest rate differential, you’ve got to look from lender to lender to lender because the consumers in the marketplace assume ….. interest rate differentials are calculated the same by all banks; they’re not,” says Regan.

“Interest penalties are different from bank to bank — some are lower, some are higher. That becomes a key issue because it can change the penalty by thousands of dollars.”

Regan says he recently compared the penalty charged by two lenders. One was almost double the other.

Nobody knows for sure what rates will do, but Regan expects them to stay low for at least the next couple of weeks.

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