Don’t judge a bank’s mortgage by its hyped-up rate

mortgage-rates-680x430A sign of spring’s arrival in Canada is a bank making what looks like bold mortgage moves to the uninformed. But within the last (2) weeks, the Bank of Montreal and Toronto-Dominion Bank announced five-year fixed-rate mortgages at 2.79 per cent, while CIBC has been offering a special introductory rate of 1.99 per cent on the first nine months of some fixed-rate mortgages.

Besides rates and penalties, some of the key variables in choosing a mortgage are prepayment privileges, or how much of the mortgage principal you can pay down every year without incurring a cost, and the length of time the lender will hold a mortgage rate for you.

Mortgage prepayment penalties are where alternative lenders really crush the big banks. Lenders calculate these penalties on fixed-rate mortgages as the greater of three months’ interest or what’s known as an interest rate differential, or IRD.

The idea behind the IRD is to compensate a lender for the interest lost when you pay out a mortgage early. Lenders have different ways of calculating the IRD, but you should expect penalties to be as much as three to four times higher at the banks than competing lenders.

If you’re dead certain you’ll stay in a five-year mortgage for five years, maybe your bank’s best deal on rates will suffice. If you want to keep your options open and possibly get a better rate, then working with a mortgage broker is the way to go.

SOURCE: The Globe & Mail