BMO announced a half point drop on their 5 year fixed rate this past Thursday. This is a record low for Canada, and has sparked a craze for the market. They are offering the program for a two week period in hopes to drive in new business. Since then, major banks have followed suit, creating a gas industry affect.
What does this mean to the average homeowner, investor, and buyer?
If you are a current mortgage holder, I highly recommend you assess the state of your mortgage. The average mortgage in Canada DOES NOT go to term - most people refinance, sell, or switch within 3-4 years of a 5 year term. Ask yourself a few questions; am I looking to a) get a better rate; b) pay my mortgage off quicker; or c) lower my monthly mortgage amount to free up some cash. With rates this low, you may be able to reap benefits of all of the above. Most banks penalty policies are the same, whichever amount is higher - 3 months of interest, or the interest rate differential for the remainder of your term (if your current rate is 5% and today's rate is 3%, the interest differential is 2%). It's virtually impossible to calculate this on your own, so, STEP 1 is to call your bank and find out what your penalty is. Call them, do not inquire online. Go ahead and tell them that you are considering refinancing because the rate drop is all over the news. I can guarantee you they have had numerous meetings within the past day regarding client retention. Play the game with them. The worst case scenario can also be the best case scenario - they offer to match the competitor's rate, and you stay with them avoiding legal fees and potential inspection and assessment fees.
STEP 2 is to think about how much money you'd like to borrow. For a refinance, you can have a minimum of 85% loan to value ( ie. $100,000 home, you are only allowed to refinance $85,000). If you have more room to play with (ie. $100,000 home with only $50,000 owing, therefore a loan to value of 50%), you may want to consider taking out some of the equity on your home to pay off existing debts. With rates 2.99%, you are better off borrowing more money with that low of a rate to pay off credit cards, car loans, or lines of credit that are higher than 2.99%. This is how you can free up some cash by taking advantage of low mortgage rates.
STEP 3 is to decide where you want to go. Since a lot of banks are following suit, and more will follow, decide where you'd like to take your mortgage. Some banks are offering 2.99% on a 4 year term, 2.89 on a 3 year term, some are even offering 2.99% on a 6 MONTH TERM (**note, this is amazing for investors). Look at what pre-payment privileges they are offering, the compounding term, and penalties.
You may also want to give it a few days, see what other banks are putting in place to battle this - they can fight the war, and you can win the battle.
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