Weekend Reading: Cheap Mortgage Rates Edition

It’s no secret that mortgage rates have been incredibly low for an incredibly long time. Even when we think rates couldn’t possibly go lower, a lender tests the waters with another record-low promotion. This time it’s HSBC with an unprecedented 5-year fixed mortgage rate of 1.99%.

But as mortgage broker Dave Larock points out, there’s more for borrowers to consider than just interest rate alone. With HSBC’s offer, for example, the mortgage must be a high-ratio mortgage (less than 20% down so that it comes with borrower-paid mortgage default insurance).

Cheap mortgage rates also tend to come with less flexible terms. That means you may not enjoy the same pre-payment privileges (allowable annual lump sum payments, and double-up monthly payments) as you would with a different mortgage provider. 

More importantly, as Mr. Larock points out, five-year fixed rate mortgage terms can be expensive to break if the borrower wants to refinance or is forced to sell their home. He says if a borrower needed to get out of the HSBC 1.99% five-year term after just two years, they’d be charged a penalty of $23,000.

A more flexible lender, in Mr. Larock’s example, currently offers a five-year fixed rate term at 2.13% and would only charge a penalty of $2,000 to break the mortgage after two years.

On the surface, a borrower would save $2,612 over five years by choosing the HSBC 1.99% rate. But is that worth giving up the flexibility (and potentially punitive penalty) of breaking the mortgage at some point in the next five years?

Borrowers by and large prefer five-year fixed rate mortgage terms, often to their detriment. Consider that an estimated 68% of mortgage holders choose a five-year fixed rate term, but more than 60% of mortgages will be paid out or restructured within 36 months. Don’t be one of these all-too-often told news stories about a borrower being forced to pay an obscene amount to break their mortgage. 

Mortgage rates are incredibly cheap today, and have been for many years. But as I concluded in this piece about renewing your mortgage, your decision shouldn’t rest solely on getting the lowest mortgage rate. Flexible terms matter, both for paying down your mortgage early, and for the ability to break your mortgage without punitive charges. 

This Week’s Recap:

On Wednesday I explained why you should forget everything you’ve heard about asset location and just hold the same asset mix across all of your accounts.

Over on Young & Thrifty I compared investing in real estate vs. investing in stocks.

Promo of the Week:

I still get a surprising number of emails from readers looking for the best high interest savings account. Savings rates have fallen sharply since the pandemic hit and the Bank of Canada made emergency rate cuts. The big banks pay next to nothing on their savings accounts, and even a former market leading online bank like Tangerine has cut its rate to just 0.25%.

I know I keep harping on this but I’ll mention once again that EQ Bank’s Savings Plus Account pays 2% interest with no promos or teasers. It’s a great place to park your short-term cash savings or an emergency fund. And, it comes with some chequing account functionality like e-Transfers and bill payments.

Open an account here and fund it with $100 within 30 days and you’ll get a $20 cash bonus for free.

Weekend Reading:

Sticking with the mortgage and housing theme, Alexandra Macqueen shares six strategies for first-time home buyers.

Stephanie Hughes wrote a great piece summarizing the 2020 CMHC saga – CEO Evan Siddall versus the world.

Ask a real estate agent or mortgage lender if it’s a great time to buy and you can guess the answer. A mortgage agent takes that sentiment one step further, offering this dangerously bad take:

“A $500,000 property you bought today will be worth $873,000 in 10 years. That’s an average of 7.45 percent annual increase, beating a medium-risk investment portfolio.”

Rob Carrick shares five numbers that will douse any high hopes you may have for the housing market.

Credit Card Genius determines which Canadian rewards program is worth the most.

In episode three of SPENT, Preet and Derrick discuss the impact of COVID-19 on the travel industry, and how it will change in the future:

Speaking of travel, The Guardian offers a sobering take on how to reinvent a tourism industry that does so much damage to our culture and climate.

Wealthsimple has introduced a new Socially Responsible Investing portfolio with lower fees and more stringent filters that weed out bad companies and even industries. 

Is your ETF portfolio actually diversified? Maybe not if you invest in a market-weighted S&P/TSX Composite index, or S&P 500 ETF.

With post-secondary education looking much different this fall, many high school graduates are weighing the benefits of taking a gap year. 

Taking a gap year usually means traveling or working. With travel not looking likely, more young people will be looking for work. Global’s Erica Alini explains who is hiring right now.

This New York Times piece warns that a tidal wave of bankruptcies is coming in the United States:

“The flood of petitions from the worst economic downturn since the Great Depression could swamp the system, making it harder to save the companies that can be rescued, bankruptcy experts said.”

My Own Advisor Mark Seed explains the tricky subject of when to sell a stock after a dividend cut.

With a dramatic rise in day trading, Ben Carlson says it seems crazy that we would see such speculation during the most severe economic crash of our lifetimes. But speculation is as old as the hills.

Finally, a new evaluation of Old Age Security reports that only 17% of Canadians were aware they could defer their Old Age Security pension. Here’s what I wrote about whether to defer OAS to age 70 or not.

Have a great weekend, everyone!