Our mortgage came up for renewal this month and, even though interest rates remain historically low, I knew we’d have to renew at a higher rate than our current 1.90 percent variable rate mortgage. Last week I met with an advisor at TD, where our mortgage is held, to see what options were available. I ended up renewing with a 2-year fixed rate mortgage term. Here’s why:
Shortly before our meeting the bank sent out a mortgage renewal package that listed all of the fixed and variable interest rate options that were available. This time around I was most interested in either remaining in a 5-year variable rate, or locking into a 2-year fixed rate term.
The variable rate offer in the package was listed at 2.45 percent, a quarter-percent discount off of prime rate. Meanwhile, the 2-year fixed rate offer was listed at 2.29 percent.
I immediately checked out a couple of rate comparison websites, namely RateSpy.com, to look for comparable offers from other lenders.
I found a handful of monoline lenders (i.e. mortgage-only, non-deposit-taking lenders) offering 2-year fixed rates and 5-year variable rates under 2 percent, but using a lender I’ve never heard of has always made me uncomfortable. Sure enough when I checked the fine print I saw caveats such as; minimum mortgage amounts of $400,000 and up, offer only applies to new mortgages – no renewals, and no double-up payments allowed.
What I discovered from RateSpy was that TD might be offering 2-year fixed rates as low as 2.19 percent to well qualified borrowers. This was not an advertised rate, but the information was gathered through intelligence from readers and mortgage advisors in the field.
Armed with this information I was ready to meet with TD and negotiate a new mortgage term.
Fixed vs. Variable
Many Canadians find comfort in fixed rate mortgages. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), 51 percent of Canadian homeowners chose a 5-year fixed rate mortgage when they purchased their home.
We pay a premium for that peace of mind, as 5-year fixed rates are generally higher than fixed rate terms of 1-4 years. Even though that premium has shrunk considerably in recent years – you can get a 5-year fixed rate today for under 2.50 percent – borrowers still pay more interest with a 5-year fixed rate.
A 5-year variable rate mortgage term has served me well for the last 10 years as prime rate has fallen from around 6 percent down to 2.70 percent. But that was when banks were keen to pass along the savings to borrowers, moving in lock-step with the Bank of Canada as it cut prime rate several times during the financial crisis.
But the last two Bank of Canada rate cuts were met with resistance from the big banks and it seems unlikely that the banks will pass along any future rate decreases to its variable rate and line of credit borrowers (not that rates have much more room to fall anyway).
The 2-year fixed rate solution
Back to the meeting with TD. I went in prepared to ask for a 2-year fixed rate at 2.19 percent, and maybe accept 2.24 percent or at least make them sweat it out and think I was looking elsewhere. After all, I had done my homework and knew what other lenders had out there.
To my surprise, the TD advisor came right out and offered 2.19 percent. All of the original prepayment privileges still applied:
- Each calendar year we can prepay up to 15 percent of the original principal amount without penalty.
- Once each calendar year we may increase the amount of our regular payment by up to 100 percent without penalty.
- Payment pause, payment vacation, and payment reduction features are available to us (although it’s unlikely we use them).
We kept the same amortization schedule. The new mortgage term takes effect September 1st and our monthly payments will go up by $31.
We saved a bunch of money last term by choosing a 5-year variable rate at prime minus 0.80 percent and riding several rate cuts down to an ultra-low 1.90 percent. Now with variable rate discounts not as attractive this time around, not to mention the banks no longer passing along rate decreases, the 2-year fixed rate mortgage looks to be a clear winner.
We’ll enjoy the savings of the still ridiculously low 2.19 percent interest rate for the next two years and then head back to the bargaining table to see whether those juicy variable rate discounts come back again.