Low rates make mortgage shopping appealing

For the vast majority of clients, their mortgage is likely the single most important financial burden they carry. Given the current economic uncertainty, clients likely don’t want to think about renewing or taking on a mortgage right now, but those familiar with the mortgage market say it’s an unprecedented opportunity, to take advantage of historically low rates.

There’s no question lending conditions are tougher, but the majority of your clients probably still qualify for an attractive mortgage rate, says Jim Murphy, president and CEO of the Canadian Association of Accredited Mortgage Professionals (CAAMP).

Murphy says the greatest uncertainty facing potential borrowers is likely employment — clients worried about employment should probably not be looking at a mortgage right now. If they feel secure in their ability to pay down debt, rates are at historic lows. He notes that a credit score of over 600 will still qualify most Canadians for a preferential rate.

“If you’ve got steady employment and you’ve got a good credit score, which is the majority of Canadians, today is a very good time to take out a mortgage, because rates are low,” he says. “Variable rates are low and fixed rates are low and going lower.”

The rate at which the Bank of Canada lends to retail banks is very low right now, and lenders are using the spread between that rate and their own as a cushion to keep the taps open. That spread is higher than it has been in the past, but lenders are still passing on some savings to clients.

Peter Veselinovich, vice-president of banking and mortgage operations for Investors Group, sees a window of opportunity over the next while, before what he believes will be an impending rise in rates. Right now he says a competitive five-year variable mortgage rate is about prime plus half to prime plus one, depending on the client’s creditworthiness. He says a competitive rate for a fixed five-year mortgage is about 4.75% to 5.00%.

He believes fixed-rate mortgages offer the most attractive opportunity. He suggests clients consider the extra basis points as a form of insurance against what is likely an environment of rising rates over the next five years, since rates are so low right now and the BoC lending rate is at historic lows.

“Rates tend to be very attractive right now,” he says. “Traditionally, a line of credit or a floating-rate mortgage would give you a better interest rate; we’re not always seeing that right now. We’re expecting rates to be pushing up from here because there is a lot of pressure on the low end of the rates.”

Until recently, it was variable-rate mortgages that had a lot of momentum, Murphy says. He attributes that to mortgage brokers and borrowers anticipating we were entering an era of lower rates.

“Basically we found, in that report in the last year, the number of Canadians that took out a variable-rate mortgage between the fall of 2007 and the fall of 2008 was 40%. The reason for that is you can always lock in when rates rise,” Murphy says. “We saw also in October some moves by some of the lenders to discontinue the discount for variable rates. It used to be common to have prime minus one on a variable mortgage. The cheapest now are usually prime plus .75% or prime plus 1%. In today’s terms this is still very good.”

Murphy says an accredited mortgage professional (AMP) usually advises clients to start shopping for a new mortgage about three to four months before their mortgage term expires. Clients may want to consider renewing into a variable rate, in the belief that rates are going down. Usually decisions on the type of mortgage come down to what the client prefers: the peace of mind that comes with paying a fixed rate; or the potential to lock in greater savings with a variable rate.

For fixed-rate mortgage holders, it may pay to wait, particularly for those in the first two years of their mortgage, because they will pay a stiff penalty for breaking the mortgage.

Veselinovich points out that taking out a variable-rate mortgage when rates are near a bottom has dangers if the mortgage is not accounted for properly in a larger financial plan. Advisors need to ensure that their client can pay the mortgage if rates start to rise; otherwise they can end up in a negative amortization situation where their monthly interest starts to exceed their monthly payments.

“You saw your doctor when you were sick. You probably saw a travel agent when you went abroad. Clients should consult their trusted financial planner or consultant when they are making major changes to their finances,” he says. “More than rate goes into the decision on what type of mortgage you should be looking at.”

He adds that, for some clients, a faster pay-down schedule at a lower rate makes sense; for others, cash flow needs require lower payments over a longer period. It’s really up to the advisor to determine what’s manageable.

“We all have this pot of money. There are necessities and there are some of the luxuries. There is that future planning for that rainy day you are accounting for. You may be losing opportunities by losing that money,” he says.

By the same token, advisors with little accreditation in advising on the actual mortgages might want to consider working in tandem with an accredited mortgage broker, such as one who holds the AMP designation, if a client is in the market for a mortgage.

(12/17/08)

Mark Noble