You can’t get any more conservative than this, when it comes to the housing market.
You want lock in that mortgage? How about knowing what your rate will be for the next 25 years? Such a product actually exists at the Royal Bank of Canada, and it comes with a hefty interest rate of 8.75%.
We’re not talking about the amortization length, just to be clear. Finance Minister Jim Flaherty has changed the rules to allow a maximum length of only 25 years for amortization.
The most popular term in Canada for consumers remains the five-year fixed-rate mortgage, locking in the rate for five years.
While it’s still a very small sliver of the market, the 10-year mortgage has started to gain a bit of traction with mortgage wars bringing that fixed term down to as low as 3.6%, according to the website ratesupermarket.ca.
"People have a problem getting their head around that long of a commitment"
Not many of us are biting on the longer terms. Bank of Montreal had to pull its 18-year mortgage because consumers just had no interest.
“We had to shelve that. It wasn’t a very accepted product by customers,” said John Turner, director of mortgages at Bank of Montreal. “People have a problem getting their head around that long of a commitment.”
The rate hasn’t always been attractive either, partially because of rules that leave the bank on the hook for lost interest if you break the mortgage after five years. The penalty in that case is three months interest instead of a more costly interest rate differential penalty and that is reflective in a higher rate.
It’s in sharp contrast to Americans, who have long locked in their mortgage, sometimes paying a fee up front to secure a rate for 30 years. The trouble in the U.S. market resulted more from teaser rates for, say, the first two years and from bad practices scrutinizing customers.
In Canada, only about 1% of Canadians go for a term longer than 10 years, according to the Canadians Association of Accredited Mortgage Professionals.
The five-year fixed-rate mortgage still comprises about 66% of the market, but 7% of Canadians have a mortgage in the six- to 10-year range.
Paula Roberts, a Toronto mortgage broker who has been in the industry for about 25 years, says she can remember only one client who went for a 25-year fixed rate mortgage.
“The funny thing is, that person is now a mortgage broker and they paid the penalty and got out,” said Ms. Roberts, noting the client had been locked in at 6.8% and got out years ago.
She says the RBC’s 8.75% rate is the posted rate and “that’s just ridiculous” and would have to be negotiated.
I would really advise clients against going longer than 10 years
A Royal spokesman wasn’t available for comment and the bank’s website says anyone interested in the product should call for details about a special offer.
Ms. Roberts says the 10-year product continues to garner interest, but she doesn’t have any information for products that go well beyond that.
“I would really advise clients against going longer than 10 years,” she said. “There are really so many things that could go wrong over that time.”
The 10-year is another story. The posted rate is 6.75% and they are plenty of lenders willing to loan money for half that.
Even with the discounting now happening on 10-year products, it will cost you money to lock in.
On a $500,000 mortgage with a 25-year amortization, your monthly payment would be $4,058.08 and you would end up paying $207,888.95 in interest over the first five years of the mortgage based on a rate of 8.75%.
Lower that rate to 3.6% and your monthly payment drops to $2,522.82 and your total interest over the first five years drops to $83,555.30.
At 2.74%, the best rate on a five-year mortgage, according to ratesupermarket.ca, and your monthly payment drops to $2,300.04 and the total interest over five years amounts to $63,218.89.
Locking in your rate is like paying an insurance premium — at some point the premium costs as much as the policy.
“That’s a hell of a price to pay for security,” said Ron Cirotto, of amortization.com. of the long term product. “I’m not that conservative.”
Apparently, few in Canada are. But 10 years of rate certainty? That’s grabbing some people and it will cost them.