Misconceptions around variable rates can cost Canadians more on their mortgage: Rob McLister
TORONTO - HSBC says it will offer rates below one per cent for some mortgages, which rate comparison website RateSpy.com says is a record low for Canada.
However, experts say the rock-bottom rate comes with costs of its own.
The bank is advertising a 0.99 per cent rate on its website for new five-year variable closed term mortgages, with the annual percentage rate, or APR, based on a $200,000 mortgage.
The deal applies to high-ratio residential mortgages, which means the homebuyer has a down payment of less than 20 per cent of the purchase price.
Rates.ca and RateSpy editor Robert McLister says that's an important point, because the low down payment means the homebuyer will also have to pay for default insurance.
“If you're wondering, 'Is it better or worse to put less than or more than 20 per cent down?' It's better to put more than 20 per cent down, even though the rates are a little bit worse, ” says James Laird, co-founder of RateHub.ca.
“Even if it means their mortgage rates aren't quite as good as the best available. The savings is on the insurance side.”
HSBC says getting the rate depends on meeting a host of qualifications, including a credit approval, a borrowing period with an amortization of 25 years or less, and a property that will be owner-occupied.
The rate is also variable based on changes in HSBC's prime rate, which now sits at 1.46 per cent, so the rate could rise over the next few years as the economy mends and the Bank of Canada raises the borrowing rate.
Mortgage rates are currently low, after the Bank of Canada dropped its overnight rate amid the COVID-19 economic downturn. The Bank of Canada's overnight rate is 0.25 per cent, while its prime rate is 2.45 per cent and its conventional five-year mortgage rate is 4.79 per cent.
As the Canadian government notes, that “conventional” five-year mortgage rate is the “stress test” rate to qualify for a mortgage. With a stress test, the borrower needs to prove they can afford payments at a rate which is typically higher than the actual rate in the mortgage contract.
But banks often offer low rates, particularly on less risky insured mortgages, as a way to draw in new customers, says McLister.
“HSBC is counting on these customers buying other financial products,” says McLister. “The mortgage is a gateway into your wallet.”
Laird notes that the Bank of Canada would only need to raise rates a couple of times before the variable rate would exceed the fixed rate. HSBC is also advertising a fixed five-year closed term rate of 1.39 per cent for high-ratio mortgages, subject to similar conditions.
“Most people are going fixed right now, and they are extremely attractive as well. There's many offers in and around 1.5 per cent - in some cases lower - for the five -year fixed rate, which is just absurdly low,” says Laird.
All said, the HSBC offer probably appeals to the minority of borrowers, given its conditions, says Laird.
But McLister says it can be worth looking at the policies set by individual banks in terms of penalties for breaking mortgages, since his sites' statistics suggest many people pull out after three or four years. These penalties can be “brutal,” especially for fixed-rate mortgages, McLister says, making the variable rate worth looking into.
McLister also recommends against the strategy of trying to switch from a variable rate to a fixed-rate mortgage to “lock in” a lower rate.
“That's one of the biggest mistakes variable-rate mortgagers make. It's extremely difficult to time rate locks,” says McLister.
“If you're that good at timing the bond market, you should be a money manager managing billions of dollars. I can't do it and I've been watching rates for 13 years.”