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A New Low for 5-year Refinance Rates

—The Mortgage Report: Sept. 15—

  • Never before has Canada seen an uninsured 5-year fixed nationally advertised for 1.84%. But on Tuesday we saw it, courtesy of Tangerine.
  • At 1.84%, Tangerine’s rate is now just 4 basis points above the lowest nationally advertised uninsured variable rate.
  • As usual, you’ll find even lower default-insured and insurable 5-year fixed offers if you shop around — as low as 1.52% through brokers.
  • A bunch of other Tangerine mortgage rates also fell on Tuesday. Most notably, the bank took an axe to its variable rate, chopping it 25 bps to prime – 0.65% (1.80%). That matches Simplii Financial for the nation’s lowest uninsured floating rate.

Or, Lock in for a Decade

  • 10-year fixed rates have sunk to just 2.39% (in Ontario only), through select brokers. This too is a fresh all-time low.
  • Of course, long-time readers know we have no love affair with decade-long terms. The breakeven versus two consecutive 5-year terms is significant: 1.31 percentage points. In other words, if your renewal rate after five years were more than 1.31 percentage points higher, you’d likely be better off in a 10-year fixed than a 5-year fixed. But that’s based on projected interest cost alone, and it assumes you make no changes to the mortgage for at least five years.
  • In practice, most borrowers do in fact make changes over a five-year span — and prepayment penalties on a 10-year mortgage are a real bugger.
  • Moreover, rates are cyclical. Hence, a high renewal rate five years from now doesn’t mean rates will stay high five years thereafter. In other words, even if rates did jump 1.31+ percentage points by 2025, it’s possible you could renew into a variable in five years and ride rates down again — for a lower weighted average cost of borrowing than a 2.39% 10-year rate.

Minimum Down Payments Surge

  • The 18.5% jump in the national average home price, versus August 2019, means that an average home now requires:
    • A 36% bigger minimum down payment ($33,614.90 versus $24,736.80)
    • An 18.5% bigger down payment to avoid default insurance ($117,229.80 versus $98,947.20)
  • For those unfamiliar with down payment rules, the reason minimum down payments have risen so much more than uninsured down payments (percentage-wise) is because:
    1. the average home price broke the $500,000 barrier over the last year, and
    2. purchase prices above $500,000 require 5% down on the first $500,000 and 10% down on the next $499,999.99.
  • In PEI, where real estate is really on fire (up 30.7% year-over-year) but prices still average below $500,000, the minimum uninsured down payment has soared by, you guessed it, 30.7% year-over-year.

RBC on its Investment in Mortgage Renewal Technology

  • “…We improved our ability to renew mortgages. And it took our [customer] retention rate up by several hundred basis points from 87%, 88% to 91%, 92%. And when you have, let’s call it, $70 billion or $80 billion of mortgages renewing every single year, if you could improve that retention rate by 400 basis points through technology, that’s a big difference.” —Rod Bolger, Chief Financial Officer, RBC, Tuesday Sept. 15, 2020 (Source)
  • Note to RBC’s (or any big banks’) mortgage customers: Shop hard at renewal, and not just for a lower rate, but for contract flexibility (i.e., better refinance options and lower penalties). Consider switching to a fair penalty lender unless you’re absolutely certain you’ll have no need to change your financing for the duration of your mortgage term.

The Growing IQ of AI

  • If a computer can write this article, a computer can someday provide you with the optimal mortgage strategy. Imagine an artificial intelligence (AI) bot that knows every mortgage rate, product, feature and lending policy from every top lender in Canada. Then imagine that bot asking you natural-language questions and using your answers and its broad product knowledge to recommend the ideal financing, i.e., the mortgage with the lowest projected borrowing costs and best flexibility for your foreseeable needs, all in 5 minutes or less with no sales pressure or bias. “Good luck with that,” some mortgage brokers and lender reps might say to themselves. But this reality is closer than some think — we’ll bet just a few years away.

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  • Reinhard Weise says:

    good luck with your mission

  • Broker says:

    Tangerine has customer friendly features too. No stupid major bank IRD penalties, good prepay options and good blend/increase rules. I’m surprised Scotiabank didn’t change Tangerine’s penalty policy after they bought them.

  • P says:

    Who are these people taking a variable when you can get a 5 year fixed for almost the same rate? There is no more upside benefit to variables but there sure as sheep is upside risk for variable rates in a few years. All these people talk about how bad five year fixed penalties are. That is just BS if you pick the right lender. If you go with a bank like tangerine you will probably never pay an IRD to get out of a fixed early.

  • Katie says:

    Just used Tangerine’s 1.84% rate as negotiating leverage with my lender to get my uninsured 5yr fixed rate down 14 bps. Thanks Tangerine!

  • I Could Be Wrong says:

    Hi P — I am one of those die hard variable fans so I thought I’d chime in. While I appreciate your and The Spy’s warnings, I think they are based on the “everyone knows” “expert consensus” that rates can’t go to zero, let alone negative. I think expert consensus underestimates how screwed up central banks and governments and economies can get.

    Since my mortgage will be small and we can handle many rate increases — and I’m willing to take that risk over 5 years just to see how low we can go. And with variable spreads from prime (on refinance) *finally* widening again to prime minus 0.65 Tangerine, I feel the time is finally right to jump from our current LoC-only life (at a bank’s 2.95% HELOC rate) to Tangerine’s 1.80% 5-yr variable plus some new room in a 2.35% HELOC (also from Tangerine). If they approve me, that is… wish me luck!

    I don’t try to calculate the % *chance* of something I can’t know. I do try to calculate the $ *impact* of each option, regardless of likelihood.

    Even two 0.25% rate hikes *tomorrow* wouldn’t quite bring us back to the same interest costs we had yesterday, so the impact of being wrong is low.

    This move gets us savings now plus a (slim, maybe) chance of further savings if I am right and the “It can’t happen here” crowd is wrong.

    Maybe I’m Lloyd from Dumb & Dumber: “So, you’re telling me there’s a chance!”

    (But you can bet I will be reading every word of the mortgage contract to see what new floors they have put on rates in the years since banks realized things can go negative.)

    • The Spy says:

      Hi “I Could Be Wrong,”

      We could *all* be wrong.

      But, to clarify what we’ve actually written, rates can go negative. It’s just a low probability as the Bank of Canada has communicated over and over again.

      One can choose to believe the most informed rate authority in the entire country or one can ignore them. We won’t judge.

      Either way, given economies are cyclical (yes, recessions end, even pandemic recessions) and governments are spending drastically more to create escape velocity from recession than they ever have, it suggests two logical probabilities:

      a) the chance of prime rate dropping is less than the chance of it not
      b) the risk of rates rising (potential “dollar impact” as you put it) is greater than the reward of them not — to *most* people (obviously not you).

      For the majority, term selection is about risk management and there’s probably never been a foreseeable time in history where the risk/reward of variables appeared this unattractive. If variables were 50 bps below 5-year fixed rates it would be a different conversation, but they’re just 4 bps below — based on nationally advertised uninsured rates.

      That shouldn’t be misinterpreted as meaning variables won’t win over the next five years. They might. The point is only this: if someone is going to roll the dice, they’re better off betting the Pass Line than a hardway 4.

  • Pissed says:

    How much have incomes gone up in the last year, 0%? Kinda makes it hard to save for a constantly increasing down payment. What is this government doing to help working class families? A whole lot of nothing.

  • I Could Be Wrong says:

    1) Apologies for my punctuation-laden post above. I thought it would add formatting. Hope I didn’t give anyone a seizure.

    2) I agree Spy, no one should bet with money they can’t afford to lose. Now that spreads from prime are finally widening again (after the George Costanza-esque shrinkage this spring from the cold-water that COVID threw on the markets), this moment is an amazing opportunity for people who want to lock in really low fixed rates through the “What Else Can Go Wrong” half-decade ahead of us. It’s the safest that safe bet has ever been.

    3) A quick shot re: believing the authority. Aside from disagreeing with that in general, the analysis has to go past what is said and into WHY something is said. Of course at this point in the cycle (and the pandemic) they would say that they don’t intend to lower rates again. They pretty much HAVE to say that, because to admit the possibility now would be to bring it into existence, to build that expectation into the markets. It’s a back-pocket thing, a last resort, a nuclear option that would only be wheeled out as part of a shock-and-awe response to whatever fresh hell 2021 has in store for us. I hope they never need it, that when 2020 is behind us it holds a special place in history as the Worst Year Ever. But there’s always a chance 2021 says “Hold my beer.”

  • David64 says:

    I am looking to buy an investment property in GTA. Should I go variable or fixed?
    What is the best available fixed and variable rate for investment property with 20% down and 30years?
    HSBC offered me 2.06% fixed 5yrs.

  • SlyguyNS says:

    So I wonder if there is any chance banks will negotiate the IRD penalty. Rates have dropped enough for me to refi and benefit greatly. But I don’t want to pay the IRD, would a bank negotiate that if I say “charge me the full amount and I will switch banks”?

    • The Spy says:

      Hey SlyguyNS, Banks almost never waive penalties but they *might* discount them to the extent of your remaining prepayment privileges (if you ask nicely and allude to leaving). Or they may be willing to build the penalty into the new rate (which doesn’t help that much other than saving you the out of pocket expense).

  • SlyguyNS says:

    I was thinking of asking them to do 3 months interest instead. Last time they didn’t work with me I left and bought 2 houses through another bank so maybe they have learned their lesson.

  • JF says:

    Anybody have experience with Tangerine?
    My broker told me they will sneak in insurance costs during the underwriting process (with over 20% down) and that he can get better HELOC rates.
    The online reviews aren’t great either.
    Great website by the way !!!!

    • The Spy says:

      Hi JF, I’d have no concern getting a mortgage from Tangerine. But if you’re in a rush to close, be sure to confirm their closing timeframe before you apply. They’re very busy right now.

      P.S. Tangerine used to be ING. ING abandoned mortgage brokers in 2013. Tangerine only deals direct and not through brokers. Hence, I would not rely on a broker’s negative opinion of the company.

  • Julie says:

    Hi there, I currently have a 5 year variable rate mortgage at prime less 1.15%, so we are currently paying 1.3% with the term expiring in Nov 2023. Should I consider refinancing now at fixed rate to take advantage of the historically low rates? We have 60% equity in our home so we do not qualify for HSBC high ratio mortgages (5 year fixed at 1.39%).

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