You’ve probably seen or read by now that, earlier this week, Investors Group dropped their 3-year variable mortgage rate to just 1.99%. The media has been giving this a lot of attention, and for good reason – it’s the first time we’ve seen a mortgage rate drop below 2.00% on our site since April/May 2010. However, we don’t think this new low rate should add fuel to the already heated housing market, and here’s why:
1. It’s Not the Same as BMO’s 2.99% Rate in the Past
For the past three years in a row, BMO has been the first of the big banks to offer what’s been seen as an extremely low mortgage rate: its 2.99% fixed rate mortgage product. When they came out with it for the first time in 2012, then-Federal Finance Minister Jim Flaherty was concerned about how it would affect both consumer and household debt levels.
Since BMO’s offering was for a 5-year fixed mortgage rate product, it did give homebuyers the opportunity to qualify for larger mortgage loans, because borrowers only had to qualify for a mortgage at 2.99%. However, for variable mortgages (like the one Investors Group is offering right now) and fixed mortgages with terms of four years or less, borrowers must use the qualifying mortgage rate as set by the Bank of Canada, which is currently at 4.79%.
Consequently, in an attempt to cool the housing market and curb consumer debt levels, Flaherty decided to influence the market in another way, and capped the maximum amortization period on mortgages with less than 20% down at 25 years (from 30 years). BMO Senior Economist, Robert Kavcic, noted that the lowered max amortization had a similar impact on affordability as a rate increase of 0.9%.
BMO has reintroduced their 2.99% 5-year fixed rate offer every year since – and 5-year rates that low have been “the norm” on our site all spring – but Flaherty’s regulation changes have helped to ensure we aren’t borrowing more than we can afford to repay. Recent rate increases by our mortgage default insurance providers are also playing a small part in this.
2. You’ll Qualify for a Smaller Mortgage than You Think
While there’s no doubt this will spark some mortgage rate wars this spring, there’s one key difference with Investors Group’s new offer: because it’s a 3-year variable, not a 5-year fixed, borrowers still need to qualify for the Bank of Canada’s qualifying rate, which is 4.79% – not 1.99%.
Here’s an example: Let’s say your household income is $70,000, you’ve saved $50,000 for a down payment and you have no minimum monthly debt payments to make. Investors Group would then have to take that information, make assumptions about what your property taxes and heating costs would be for your home, and calculate your debt service ratios to determine your max affordability.
|Household Income:||Down Payment:||Monthly Debt Payments:||Property Taxes:||Condo Fees:||Heating Costs:||Amortization Period:|
This mortgage calculator tells us that if 1.99% was the qualifying rate (which it is not), your max affordability would be $341,990. However, because you need to qualify for the Bank of Canada’s qualifying rate, which is 4.79%, your max affordability drops down to $281,000.
3. It Comes with a Number of Restrictions
Of course, even though the rate itself is still appealing, there are other things to consider when looking at this product, such as:
- It’s a variable rate of Prime – 1.01%, meaning if Prime fluctuates up or down, your mortgage rate (and, therefore, your mortgage payment) will too
- It’s not available for pre-approvals, which means you can only get it if you are going to finance your mortgage through Investors Group (not just thinking about it)
- It’s a closed mortgage product, which means it cannot be prepaid, negotiated or refinanced throughout the 3-year term
- The only way to break the mortgage term early is by selling your home
4. The Offer Will Expire Soon
Perhaps the most important piece is that Michael Klatt, Assistant Vice President at Investors Group, told us they have limited funding for this offer. Once the funding runs out, they will issue a 5-day notice on the expiration of the offer – and that’ll be the end of that.
The Bottom Line
The 1.99% offering is a brilliant move for Investors Group – this is a company whose primary business is financial planning, so bringing in new customers with this low mortgage rate gives them the opportunity to try and sell more of their products and services. However, it seems Investors Group underestimated the media attention that would follow such an aggressive rate; not only that, but a call from the office of the Ministry of Finance.
Nevertheless, if you think a 3-year variable rate mortgage term is right for you, we simply suggest you do your homework on what’s included in the product (and what’s not) and “stress test” your mortgage. As with any variable rate, especially one with such a short term, you want to make sure you can carry your mortgage if interest rates rise or are higher when it’s time to renew.