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:

Mortgage renewal 2-year fixed rate

Mortgage Shopping

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.

Final thoughts

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.

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5 Comments

  1. Gene on August 15, 2016 at 3:42 am

    I had to make a similar decision this spring. Our 5 year variable rate mortgage was up for renewal and we’ve been paying around 1.9% interest on the mortgage several years due to our discount. We added an extra payment every second week and had the ability to pay 20% of the principal every year.

    The research I did showed the banks would not provide the same variable rate I got in 2011. The best was a fixed 2 year rate around 2.5%. I refused to get a new mortgage at that rate. I think banks need to get more creative for some segments of the population. I decided to pay off my mortgage instead since I don’t need the cash. We only needed a small mortgage of $100K and it felt like no bank or mortgage broker was willing to get creative.

    I hope one day a smart bank will start tailoring rates to accommodate certain segments of the population.

  2. Dima on August 15, 2016 at 7:39 am

    I got my 1.95 5-years variable last year with TD.

  3. Mike on August 15, 2016 at 9:43 am

    I like the comment “ridiculously low rates.” My fathers tells of his “ridiculously high rate” in the early 80s upwards of 16%–which is ridiculous!

    With the low rates for the last 7 years, I think it is important to keep in mind that the actual rate is only one part of the equation. As is mentioned above, increasing your mortgage payment, using pre-payments and paying biweekly could have more of an impact on paying down your mortgage than the actual rate–as well as not buying too much house.

  4. Nelson on August 15, 2016 at 12:25 pm

    The whole move of shopping around and then going back to your bank to get them to match the best offer out there is supremely underrated, IMO. Mortgage brokers hate it though. I know when I was a broker I lost at least one deal to somebody doing just that.

    I still think those no-frills mortgages can be a decent deal for somebody who knows they’re not going to make many extra payments. You can also invest that money in the meantime and then pay it down at the end of the term in a big lump sum.

  5. Dividend Earner on August 16, 2016 at 8:48 am

    I switched from variable rate last year as well but I was able to find a 5 year rate I was happy with.

    I also use RateSpy to research and then I went with a mortgage broker to help me out as the bank did not want to match. The mortgage broker was able to get me what I wanted at the same big bank.

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