Pondering merits of low-rate mortgage financing? Crunch the numbers when deciding whether to convert from variable

With today’s unprecedented low interest rates, homeowners may be wondering if it’s a good time to refinance or lock in their variable-rate mortgages.

The Bank of Montreal last week introduced a 2.99-per-cent five-year mortgage — believed to be the lowest five-year fixed mortgage rate ever.

Although BMO’s low-rate mortgage has some restrictions — including a maximum 25-year amortization and limited prepayment options — it could potentially save a lot of money for homeowners who qualify.

After BMO announced the new mortgage, some other banks followed suit, announcing similar low-rate products, but none we found that match the five-year term. TD and RBC announced 2.99-per-cent mortgages for four-year terms.

“In today’s environment, it’s an extremely competitive rate at about [.5 of a percentage point] off what most financial institutions have posted right now,” said Carolyn Heaney, area manager for specialized sales, BMO. “People are very interest-rate savvy, so a 2.99 has caused a lot of inquiries.”

BMO introduced its low-rate mortgage product in March 2010; the product’s previous low was 3.29 in December 2011.

Richmond mortgage broker Chris Pughe said just one of the lenders she deals with, AGF, is offering 2.99 for a five-year fixed mortgage, but several are close.

“There are some with a four-year at 2.99 and a lot of the lenders are at 3.19 or 3.29 right now [for five years],” Pughe said.

Any decision to refinance or lock in will depend on what a person has already committed to — term and interest rate — and what penalties will have to be paid. At BMO, mortgage penalties are whichever is greater: three months’ interest or an interest rate differential, which is a calculation based on what the bank will lose in interest if you pay your mortgage off early and renew at a better rate.

But penalties vary from one financial institution to the other, Pughe said. She gave the example of a five-year mortgage at Vancity, where for the first three years an interest rate differential penalty will apply, but in the last two years the penalty will only be three months’ interest.

Pughe said it only takes a mortgage broker or banker about 10 minutes to figure out if breaking your existing mortgage and renewing at these low rates makes financial sense.

Most people who locked in about five years ago are at about 5.09 to 5.49 now, Pughe said. If they locked in three years ago, in late 2008, rates were 5.0 to 5.5 and in early 2009, they were a bit lower at 4.24 to 4.5. Today, the equivalent rate is about 3.29.

Although 5.29 is the regular posted five-year rate at BMO, the rate charged is usually less because banks offer discounts based on their relationship with a customer.

The 5.29 rate is close to the lowest posted five-year rate BMO has offered in the past 20 years, which was 5.25 in April 2009.

But it’s still anybody’s guess whether this will be the bottom, if rates will drop further, or go up.

“I remember when rates dipped in 2004-05, the best rate was 4.3 and we all thought we’d seen the bottom,” Pughe said.

As far as variable-rate mortgages go, Pughe said if you’re lucky enough to have one with a good discount, it’s probably a good idea to hang onto it.

“The best discount you’re able to get right now with a variable-rate is prime minus two, which is 2.8 per cent,” Pughe said “That has shrunk in the past two or three months because we were able to get prime minus [.8 or .75 of a percentage point] not that long ago.”

Most people taking new mortgages are going with fixed rates, Pughe said.

“It depends on people’s personal risk tolerance,” Pughe said. “There are people who hear on the news that interest rates are going up, then they call you at 11 at night. Those are the people who shouldn’t be in variable rates.”

Even though BMO is promoting its 2.99 mortgage, Heaney said most people opt for a 30-year amortization rather than 25.“Everyone stretches out and that’s not bad advice,” Heaney said.

“One suggestion is to go out to the maximum and then you can control, as the consumer, how you want to pay that back.

“People are more conscious of their debt today, and they want to pay their mortgages off as quickly as possible, but they don’t want to be house poor, where they can’t do anything.”

Heaney said the decision about whether to lock in a variable rate is a matter of how well you will sleep at night.

“It’s always a gamble when you go into a longer-term rate because you don’t know what the future rate will be, but a five-year at 2.99 is pretty much unprecedented,” Heaney said.

For Pughe, the bottom line is if you have a variable mortgage with prime minus .75 or .8 of a percentage point, leave it, because there’s no pressure on prime to go up.

“But if you’re in a fixed term, and if you’re paying a three- month interest charge penalty, it makes a load of sense to make a phone call.”

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