A scattering of lenders are starting to warn of impending rate increases. No surprise—given Canada’s 5-year bond yield, which drives fixed mortgage rates, hit a new relative high on Thursday. At 0.60%, it’s now the highest it’s been since April 9, 2020.
When the 5-year yield was last at these levels, your typical discretionary 5-year fixed rate at a Big 6 bank was over one point higher—2.89% versus just 1.84% today.
So, are we going back to 2.89% anytime soon? No chance. Those were inflated spreads triggered by the COVID crisis. But, some kind of increase is likely in the cards, particularly for the most competitive rates. The lowest nationally available uninsured5-year fixed is 1.69%, for example. That’s just a 109-bpsspread above the 5-year yield (135+ is more normal for deep-discount rates).
All of this means one thing: It’s rate-hold time if you’re closing a mortgage between now and the end of June (since most rate guarantees last only 120 days or less).
Some lenders will milk their current low rates for all they’re worth in order to keep the volume flowing—i.e., they’ll defer rate increases. But don’t bet on that lasting long…unless there’s a further derailment of our economy, which is possible, but less probable the further we get into 2021.
Mortgage Penalty Workaround
There’s an old trick to reduce mortgage penalties that’s been making the rounds on social media. Here’s the story that’s creating the buzz. It’s got the mortgage Twittersphere rejoicing because it lets the little guy use the bank’s own penalty rules against it.
It works like this: Instead of breaking your mortgage and paying a huge IRD penalty, you:
request a “blend and extend” into a new 5-year fixed term
then break the mortgage.
The blend and extend resets the mortgage term (at some lenders) and lets the borrower take advantage of more favourable (higher) comparison rates. The higher comparison rate reduces one’s interest rate differential and the penalty drops from a fiendishly expensive IRD charge to a much cheaper three months’ interest.
If you want to try this yourself, note the following:
It does work, but only at a limited number of lenders.
Many lenders don’t permit blends into new terms (many force you to blend to term, meaning you keep your existing term until the maturity date). This negates the strategy altogether.
Some lenders have closed this loophole in other ways (e.g., contractually).
You need to confirm if your lender’s policies support this manoeuvre. You can run a test scenario using your lender’s penalty calculator, or you can just call the lender to ask what your penalty would be if you blended and extended, and then had to break the mortgage one month later.
Sadly, most lenders who still allow this loophole will eventually close it. And this story doesn’t help. At other lenders, however, it’ll take a while.
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I’ve always ignored blend and extend because it doesn’t actually reduce total interest costs, it just defers some costs until later. But using it as a way to reset your term is brilliant. I feel a bit stupid for not realizing it myself.
Unfortunately TD caught up with the loophole. They add a percentage, that I am not sure how they calculate, to the discount rate so it will always have a high IRD penalty.
Doug,
TD, AFAIK, is unique among the big banks in offering a “mortgage replacement policy” that lowers your penalties when you refinance and increase your principal by at least $20k. I have yet to see the full wording of the whole policy, but one option reduces the penalty by up to $1000, and I believe another option reduces the penalty to 3 months’ interest.
Ralph,
Thanks for sharing that, but a google search shows a TD official document that states only applicable when the prepayment charge on the discharging mortgage is the 3 months’ interest prepayment charge. If the charge is IRD it is always payable. Also, replacement must occur within one year of mortgage discharge.
So basically when you are already able to switch to a monolender offering a better rate.
Eligibility:
* Minimum of one borrower on the existing Mortgage must be on the new Mortgage.
* A guarantor/co-signor is not considered a borrower.
* Only 1 borrower is eligible to take advantage of the replacement policy.
* Replacement must occur within one year of mortgage discharge.
* Reverse Mortgage Replacement (purchase closes before sale) only valid when new Mortgage is advanced within 120 days prior to the discharge of current mortgage. No exceptions.
* Only applicable when the prepayment charge on the discharging mortgage is the 3 months’ interest prepayment charge. If the charge is IRD it is always payable.
Doug,
It looks like you took that from an outdated 2014 document for brokers. The current mortgage replacement rebate is no longer $300, it’s $1000 when you increase the principal by $20k. This I’m certain of as a family member is in the process of doing a refi. I have emails from two TD branch managers confirming this part of the policy.
I think you might be correct about the date the document I read was released.
I will talk with my mortgage advisor and see what he says about it, if he confirms I will come back and update this comment.
Hey Ralph,
You know anything about how Scotiabank does it?
Doing a ‘blend & extend’ right now. Hoping I only have to pay the 3 months interest afterward.
I currently have 1.15% (Insured 5 yr variable rate) with 4.2 yrs remaining with $740K mortgage left. Should I continue or lock in for 5 yrs. fixed rate If I get close to 1.35% or even lower? I am not selling home for next 5 years.
To anyone who check this comments in the future the final answer I got from multiple TD employees about the mortgage replacement rebate is:
TD would give you back a portion of the penalty fee you paid, if you were selling your house and buying a new one within 90 days of the sale of your first house, and keeping the mortgage with TD.
Hey Tejas P., would you mind sharing which lender offers 1.15% on a insured 5 yr variable rate?
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11 Comments
I’ve always ignored blend and extend because it doesn’t actually reduce total interest costs, it just defers some costs until later. But using it as a way to reset your term is brilliant. I feel a bit stupid for not realizing it myself.
Unfortunately TD caught up with the loophole. They add a percentage, that I am not sure how they calculate, to the discount rate so it will always have a high IRD penalty.
Doug,
TD, AFAIK, is unique among the big banks in offering a “mortgage replacement policy” that lowers your penalties when you refinance and increase your principal by at least $20k. I have yet to see the full wording of the whole policy, but one option reduces the penalty by up to $1000, and I believe another option reduces the penalty to 3 months’ interest.
Ralph,
Thanks for sharing that, but a google search shows a TD official document that states only applicable when the prepayment charge on the discharging mortgage is the 3 months’ interest prepayment charge. If the charge is IRD it is always payable. Also, replacement must occur within one year of mortgage discharge.
So basically when you are already able to switch to a monolender offering a better rate.
Eligibility:
* Minimum of one borrower on the existing Mortgage must be on the new Mortgage.
* A guarantor/co-signor is not considered a borrower.
* Only 1 borrower is eligible to take advantage of the replacement policy.
* Replacement must occur within one year of mortgage discharge.
* Reverse Mortgage Replacement (purchase closes before sale) only valid when new Mortgage is advanced within 120 days prior to the discharge of current mortgage. No exceptions.
* Only applicable when the prepayment charge on the discharging mortgage is the 3 months’ interest prepayment charge. If the charge is IRD it is always payable.
Doug,
It looks like you took that from an outdated 2014 document for brokers. The current mortgage replacement rebate is no longer $300, it’s $1000 when you increase the principal by $20k. This I’m certain of as a family member is in the process of doing a refi. I have emails from two TD branch managers confirming this part of the policy.
Ralph,
I think you might be correct about the date the document I read was released.
I will talk with my mortgage advisor and see what he says about it, if he confirms I will come back and update this comment.
Thank you again for taking the time to answer.
Hey Ralph,
You know anything about how Scotiabank does it?
Doing a ‘blend & extend’ right now. Hoping I only have to pay the 3 months interest afterward.
Hi Spy,
I currently have 1.15% (Insured 5 yr variable rate) with 4.2 yrs remaining with $740K mortgage left. Should I continue or lock in for 5 yrs. fixed rate If I get close to 1.35% or even lower? I am not selling home for next 5 years.
Any Advice would be helpful.
Thank you.
@Tejas, See my response on the other thread.
To anyone who check this comments in the future the final answer I got from multiple TD employees about the mortgage replacement rebate is:
TD would give you back a portion of the penalty fee you paid, if you were selling your house and buying a new one within 90 days of the sale of your first house, and keeping the mortgage with TD.
Hey Tejas P., would you mind sharing which lender offers 1.15% on a insured 5 yr variable rate?
Hey Doug, That’s how most banks work, except the portability timeframe usually ranges from 30-120 days depending on lender.
Also, HSBC has 0.99% on a 5yr variable if it’s a purchase.