Was it a mirage or was the 5 year fixed rate mortgage really as low as 2.99%? The short answer is yes and no. BMO was the only mortgage lender to actually post a 5 year fixed rate mortgage at 2.99%. The catch is that they have two 5 year fixed mortgage rates, and the 2.99% was their “Low Rate Mortgage” which is really a no frills mortgage. In other words, they will make up for the low rate by making money during the term of the mortgage. The flip side is, of course, that borrowers will pay more during the term of the mortgage to make up for the exceptionally low rate. These extra costs will not be paid by everyone. If you make absolutely no changes during the 5 year term you will win. However, if you want to make pre-payments or find yourself in a refinance position for example, it may end up costing you more…you lose. These additional costs could come as lost savings from limited pre-payment privileges, accepting a higher rate during a refinance because you are prohibited from shopping the market, or the inability to skip a payment during an unexpected hardship. Statistics have shown that despite their intentions, the average Canadian touches their mortgage every 3 years. Most borrowers choosing a 5 year fixed mortgage rate do so for peace of mind. Not the typical profile of a win/lose gambler.
Other lender’s needed to compete with the sexy “below” 3% mortgage rate, but didn’t have a no frills product. The solution? Many of the major banks quickly dropped their 4 year fixed rate to 2.99% and threw that into the mix. This 4 year product offered the full features Canadians have come to expect (and maybe assume) in a fixed rate mortgage. The down side to this product is 1 year less to the term. Here we are at record low rates. It’s an ideal time to lock in to the longer 5 year term. Is the trade-off to go 4 years worth it? Only time will tell.