Are 2.99% Mortgages Worth It?

January 26, 2012 by

 

rbc, bmo, td, banks, mortgage rate, interest rate,Bank of Montreal did the unthinkable to attract new mortgage customers by dropping their pants on the five-year fixed mortgage with an ultra low 2.99% interest rate. Something that was simple unheard of before. January, which  is a traditionally sluggish month for mortgage sales has sparked other banks to follow suit. A few days later RBC and TD introduced their own ultra low interest rate mortgages. Last week TD  lowered its four-year fixed-rate mortgage to 2.99 per cent, down from 4.79 per cent, and RBC dropped its four-year fixed rate mortgage to 2.99 per cent, and 3.99 per cent on a seven-year fixed-rate mortgage.

Think before signing on the dotted line. A good read of the fine print is a must. These mortgages have restrictions that don’t come with other products. These mortgages offer Canadians a way to be mortgage-free faster due to great rates and a shorter amortization.

However, these ultra low interest rate mortgages do differ from traditional mortgages in several ways.

  1. You are locked in for the term of five years. In other words you cannot refinance or switch your mortgage to another lender for five years.  On average, most home owners switch their mortgages during the period of the last two years of their mortgage by either refinancing into a better rate or move onto a better rate.
  2. A typical mortgage offers an amortization period of up to 30 years. The maximum amortization period is 25 years on these ultra low interest rate mortgages.
  3. Unfortunately you cannot skip or double-up on a payment. Sad, I know.
  4. You can make as lump sum payment  only once a year equal and increase your monthly payments. The catch is that it has to be 10% of the principal amount owed or less. Most traditional mortgages let you make monthly and lump sum pre payments of 20% or more.
So, are these new mortgages right for you?
Yes and no is the answer. These new mortgages are best-suited for those who plans to be in their home for a longer period of time. If you’re looking to move, these mortgages are not right for you. Instead stick more traditional mortgages that offer you higher flexibility.
If you don’t have intentions to move within the next five years, a mortgage with a 2.99% interest rate may be right for you. However, don’t be fooled. Even though I’m locked into a five year mortgage rate of 3.8% almost three years ago, I had other options at the time. Despite having the ability to grab a lower interest rate, I chose a slightly higher rate due to security. Correction – my own insecurity. I was a first time home owner and didn’t want to worry about whether my payments will changes over a certain period of time. I knew I could afford “x-amount” of dollars now and for the next five year, so I chose security.
I also have the option to contribute up to 20% in lump sum or in extra payments as a faster way to reduce my mortgage. I’ve yet to contribute even one yet. Truth of the matter is that very few Canadians with a mortgages contribute extra payments to reduce their mortgage. Count me in, I’m one of those.
If you’re a young first time home buyer, these new mortgages may be right for you. They give you the security and peace of mind for the next five years. You have a little wiggle room as well towards reducing your mortgage faster. You can only make a lump sum payment once  a year and it has to be less than 10% of the total amount left that you’re owing. Be true to your self though. If you’re like most Canadians, you probably will never contribute extra payments. And even if you do choose to contribute extra payments, being limited to a maximum of 10% is not the end of world either.
One other point. Please don’t be fooled by such low interest rates. These rates have been around for a while. Maybe not in as a fixed rate, but definately as a variable rate. I am certain you get a lower interest rate in a variable rate mortgage, probably as low as 2.5%. The difference is the security. In a variable rate mortgage, as the rates rise, so does your monthly payments. So, is half a percent worth the hassle? For some it may be, for others who prefer security, not so much.
What do you think of the 2.99% mortgages?
Eddie
Filed Under: Mortgage

Comments

  1. Marko says:
    October 11, 2012 at 8:07 PM

    I’ve been following the blog for a bit now and really like it, good work. I am a TD Employee that has always tried to find a solution for my clients’ home purchasing or debt restructuring needs. With respect to the mortgage features on the special rate offers on a TD mortgage, we don’t really hide in the fine print and offer the same options as all of our other mortgages, that is:
    - full 30 year amortization
    - the ability to double up payments (pay an extra 100% – all of which go to principal)
    - up to 15% prepayment of original mortgage amount (not current outstanding amount) per calendar year (also can be made in multiple deposits totalling not more than 15%)
    - payment vacations (skip a payment) contingent on approval

    Also many banks will only allow the discharge or full payment of your mortgage through the sale of your home on these special rate offer mortgages. TD will not restrict the movement of your mortgage, but will charge a replacement cost for your mortgage which will be the interest rate differential (IRD) or three months interest (whichever is higher). This IRD may be quite high but understand that by moving your mortgage you are breaking a contract and there is a cost to breaking that contract. Hey, banks can’t opt to cancel your high 5 year rate GIC midterm simply because they can offer a lower rate right?

    Anyways, I always make sure that people know what all of their options are when they sign their mortgage agreement. If I can offer any advice to help them pay down their mortgage faster, I will. My top tip: when renewing your mortgage at a lower rate (which most people are doing now anyways) keep your payment at the same amount (unless cash flow is an issue). You’ve already gotten used to paying that amount so why not keep it the same and pay a little more principle in the meantime.

    Keep up the great work on this blog!

    Marko