Mortgage Smarts
A little mortgage savvy gets some big savings
By Rob Carrick - Globe and Mail
Unwary mortgage borrowers are always a mark, but never more so than this spring.
While interest rate discounts are readily available from lenders, there are things you need to know to avoid being hustled. And look out for those cash-back offers. They’re being flogged aggressively, but they’re a trap if ever there was one.
When last this column looked at the mortgage market, it was late in 2007 and most lenders had inflated their rates well beyond what they should have been according to traditional measures. Today, things are worse.
A good way to assess the level of mortgage rates is to compare how much more a five-year fixed mortgage costs in comparison to a five-year Government of Canada bond. The spread, or differential, is now about four percentage points, up from 3.6 points last fall and much higher than the five-year average level around 2.44.
With financial markets still volatile as a result of the subprime mortgage mess in the United States, it’s costing banks more to raise the money they lend out. Banks are passing these costs on to borrowers, but at the same time they’re trying to protect and build their share of a very crowded market.
Broker Jim Tourloukis of Advent Mortgage Services in Unionville, Ont., said the result is the most competitive mortgage market he’s seen in the past 14 years. “The banks are ultra-aggressive right now,” he said. “So if you’re a keen negotiator, you can do a heck of a lot better with the banks today than you could have six months ago.”
To negotiate effectively, you need to understand that there is a bigger gap than in the past between the fictional world of posted mortgage rates and the actual discounted rates that smart borrowers pay.
It used to be that a discount of one percentage point off posted rates was a top deal for a five-year mortgage, and then the gold standard was around 1.25 points. Today, it’s closer to 1.5 points or more. Variable-rate mortgages were commonly available with discounts of 0.9 of a point off the prime rate a year ago, but today the best deal seems to be in the area of 0.6.
Royal Bank of Canada and Toronto-Dominion Bank’s TD Canada Trust branches were offering “special” five-year rates yesterday of 5.93%, which compared with their posted rate of 6.99%. But the lowest five-year rates in the market today ranged from 5.34% to 5.54%.
It’s a similar story with Bank of Nova Scotia’s limited-time Save More, Save Later Mortgage, which on the surface looks tempting. You get two percentage points off the posted one-year rate (currently 6.9%) and, on maturity, you have the opportunity to switch to a five-year mortgage with a guaranteed discount of 1.25 percentage points. Guess what - most any mortgage broker can get you something very close to 4.9% on a one-year mortgage today, and they should be able to do a fair bit better than 1.25 points off on the long end.
Cash-back mortgages have been around for years, but they’re getting a bigger push than usual from some banks this spring. TD, for example, has been promoting its 7% Cashback Mortgage, which offers up to $50,000 for clients who set up a seven-year mortgage. You can also get 6% cash back with a six-year mortgage and 5% with a five-year mortgage.
It’s a struggle to afford a home today with the average price across the country hitting $313,000 in February. But a cash-back mortgage isn’t the answer.
“A horrible product,” Mr. Tourloukis said of cash-back mortgages. Vince Gaetano of Monster Mortgage in Toronto dislikes them, too. “At the end of the day, the math is not beneficial to clients. They always will lose.”
It’s a general rule that when a financial institution offers you an upfront incentive to buy one of its products, the point is to divert your attention away from getting a better deal on your own. This is never truer than it is with cash-back mortgages.
You have to take the posted rate with these mortgages and, if you want to break the mortgage before it matures, you should expect to pay a prorated amount of the upfront cash you received. The interest rate issue is the more crucial.
Imagine you take out a five-year $200,000 cash-back mortgage at the posted big bank five-year rate of 6.99%. You’d get $10,000 in cash handed to you by TD, but you’d pay about $13,500 more in interest over the five-year term than if you went with a discounted rate of 5.54%.
Another consideration is your household cash flow. The cash-back mortgage would cost you just under $700 on a biweekly basis, while the discounted mortgage would run about $613.
Just say no to cash-back mortgages, and remember that the stakes on mortgage discounts are higher than ever. That’s how you survive in the mortgage jungle this spring.
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Contact the Jeffrey Team for more information - 416-388-1960