—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:
- 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:
- the average home price broke the $500,000 barrier over the last year, and
- 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.