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New twists in mortgages fuel debate

BY GARRY MARR, FINANCIAL POST JANUARY 14, 2012

Long-term mortgage rates have dropped to the lowest point in Canadian history – and the stampede to lock in is expected to pick up.

Bank of Montreal became the first major financial institution to bust through 3%, with its 2.99% closed fixed-rate mortgage for five years. Others are sure to follow.

If five years isn’t long enough for you, ING Direct has weighed into the current mortgage discussion with a 10-year, fixed-rate product at 3.89%. The added bonus of going longer than five years is that under law after half a decade you can break your mortgage for as little as three months’ interest.

Toronto-Dominion Bank, which had already lowered rates on six-and seven-year fixed-rate terms, now has lowered the four-year fixed rate to 2.99%. Farhaneh Haque, director of mortgage advice and real estate-secured lending at TD, says the argument has never been stronger because there is no guarantee these deals will be available in two years. The two new deals from TD and BMO are limited-time offers.

“Buyers have to evaluate if they want to stay in variable,” says Ms. Haque, suggesting that even those with deep discounts might want to consider scrapping those deals to take advantage of the historical bargains.

It’s hard to argue against locking in, unless you are one of the lucky people with a variable-rate mortgage tied to prime that came with a whopping discount. Some consumers have deals with as much 90 basis points off prime, meaning they are borrowing at 2.1%. That’s not the same as negotiating today, when you’ll only get 10 basis points off, or 2.9%.

“You’ve got a dinosaur, you are living in Jurassic Park with something that doesn’t exist anymore. You can’t get that again,” says Vince Gaetano, a principal broker at Monster Mortgage, who suggests you keep the low rate and use the savings to pay down your mortgage as fast as possible. “You cut your mortgage in half and you don’t care as much what the interest rate is when you renew.”

He advises you to keep on eye on some of the new products and stipulations that might include things like prepayment terms and amortizations.

Bank of Montreal’s new product demands you get a 25-year amortization, instead of the maximum 30 years, and will let you prepay only 10% per year of the original mortgage amount. TD’s new four-year product will let you prepay 15% while ING Direct goes as high as 25% prepayment.

“You should seize the opportunity and pay down that mortgage,” says Mr. Gaetano, adding that giving up something on the prepayment can ultimately mean a higher effective interest rate. “People are taking advantage of the prepayment terms.”

Will Dunning, chief economist to the Canadian Association of Accredited Mortgage Professionals, says his own studies have found only a small minority of Canadians prepay more than 10% of their original mortgage each year.

“They might do it because of some sort of windfall or a big bonus,” he said, adding that his most recent study found 36% of mortgage holders made additional efforts to pay something above their regular payment.

gmarr@nationalpost.com

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