As BMO and TD cut rates, borrowers should look at the big picture

Last year’s mortgage rate wars made headlines, with Investors Group’s three-year variable rate reaching a new low at 1.99 per cent. And as we head into the spring home-buying season, lenders are continuing to battle it out for customers by publishing ultra low mortgage rates.

Although Bank of Canada kept its overnight interest rate steady at its most recent announcement earlier this month, two banks recently cut their rates to remain competitive this time of year. Earlier this week, Bank of Montreal lowered its five-year fixed mortgage rate from 2.99 per centto 2.79 per cent, and TD Canada Trust announced it would match that rate. Of the Big Five Canadian banks, that’s the lowest ever posted five-year mortgage rate.

As Atrina wrote in this Huffington Post piece last spring, borrowers need to weigh more factors than just the interest rate. A super low rate may be appealing since it means a minimal amount of interest paid over the mortgage’s term and low monthly payments, but there may be caveats attached that would make that mortgage option a little less appealing overall. Don’t mortgage shop on rate alone. In fact, a lot of people don’t qualify for the ultra low rates advertised as it may only be available for certain transactions such as an insured mortgage.

A good mortgage broker can help you consider other factors like these:

  • Is the loan term right for your needs? Often those shockingly low rates apply to a two or three year term, because the lender doesn’t want to be stuck at that rate for a full five years (BMO and TD’s recent rate cut is a notable exception). But when the term ends, you may not have the option of another ultra low rate, so choosing a more moderate rate over five years might have been the better choice depending on your plans.
  • Does it offer the flexibility you need? If you’re planning to sell your home before the end of your mortgage term, then mortgage portability (the ability to move an existing mortgage to a new home) might be important to you, because it would help you avoid prepayment penalties.
  • What are the prepayment penalties? Prepayment penalties are typically equal to three month’s interest on your current mortgage or the interest rate differential, whichever one is higher. The interest rate differential (or IRD) equals the difference between your current mortgage rate and the rate that your lender could charge in present day by re-lending funds for the remaining term of the mortgage. However, some mortgages give you the option to prepay up to 10 or 20 per cent each year without incurring penalties.

Are you in the market for a home in British Columbia? Download your free Complete Home Buying Guide 2015 to get expert advice on working with a mortgage broker, securing financing and more!

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