2016-02-12 | 10:01:33
As we mentioned in our last post this blog series is going to work through the categories listed on our Mortgage Comparison Worksheet. The first category on the sheet is RATE. We start our comparison with rate because it is often the most over used variable when comparing one mortgage to another. What we want the consumer to keep in mind is that comparing two mortgages simply by rate can be comparing apples to oranges. The media stresses rate all the time because it is something that is simple to address and compare, whereas the other features of a mortgage are not and in a sound bite would most likely leave the public confused as opposed to informed.
To understand the nature of rates one has to understand the nature of capital markets, and let’s face it that’s a pretty dry and boring topic, so we’re going to keep things as simple as we can here for you, we’d like you stay awake while reading this! So let’s just say that fixed rates have a relationship to Government of Canada (GoC) Bond rates. As GoC Bond yields rise so will the associated fixed term rate, and vice versa. Variable rates however are tied to the bank prime rate which is usually, but not always, tied to the Bank of Canada (BoC) target overnight rate. This is the rate that is set quarterly by the BoC, you may recall seeing this on the news every once in a while.
Now we move on to the part that can get confusing, posted versus discounted rates. All of the major Canadian banks (RBC, Scotiabank, TD, etc) work from what is called a posted rate. They then ‘discount’ from that posted rate to give you your fixed term mortgage rate. So for example at the time of writing this article (Feb 2016) the posted five year rate at most banks is 4.64%, whereas the discounted five year rate could be anywhere from 2.69-2.99% depending on the discount you receive from that posted rate. Non-bank lenders, lenders who generally use a broker channel to bring in new customers, simply have discounted rates. Some have posted rates, but the difference between their posted rates and discounted rates is often only 0.10-0.20% as opposed to the over 1% difference you can see with the bank lenders. These non-bank lenders play a crucial role in rate competition as without those the banks would not have to discount from their posted rates!
Sometimes both bank and non-bank lenders will offer special extra low rate mortgages, you’ve seen these advertised on TV. It is important to look very closely at these mortgages as often that extremely low rate is a tradeoff with limited features or restrictions that can be costly. For example some lenders offer a very low rate a on a five year, the catch being that you cannot break term without selling your property, so make sure you read that fine print and analyze ALL of the mortgage features.
We hope that this has helped you to understand mortgage rates a little more; we strongly believe that an informed mortgage consumer is paramount because it is your mortgage, your money, therefore where you place your mortgage should be your choice. In our next post we will walk you through penalty calculations, stay tuned!
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