Investors Group 1.99% variable mortgage rate has a few
There’s no denying the importance of getting a low interest rate when you get a mortgage, but there are big caveats that come with some of the record discounting going on for residential loans.
“There are restrictions,” said Toronto mortgage broker Paula Roberts. “If it sounds too good to be true, sometimes it is.”
The broker community was abuzz this week with clients looking to get in on a new product from Investors Group taking the rate down to 1.99% for a three-year floating rate loan. That’s a discount of 101 basis points off of prime and one of the steepest discounts in history on a variable-rate loan.
Investors Group does not offer the product through mortgage brokers but that hasn’t stopped the industry from asking about it and looking more closely into some of the penalties for breaking the mortgage.
The only way for the consumer to get out of the mortgage is to sell their house, a similar penalty that Bank of Montreal had when it unveiled its 2.99% fixed-rate mortgage with a five-year term.
Typically, the penalty for breaking a variable rate mortgage — and one of the things that makes it attractive — is you only pay a penalty of three months interest at prime as opposed to more expensive interest rate differential penalties.
The Investors Group penalty on its new variable is not the norm — something the market has seen with other steeply discounted products.
There are other issues to consider on any mortgage, especially variable rate products. If the product is not convertible to a fixed rate, you might have a problem in a rising rate in environment.
“When you are in variable rate and getting say prime minus 50, which is standard in the industry, you can convert at any time to a fixed product,” said Ms. Roberts.
Investors Group also has some restrictions on converting its variable rate product to a fixed rate. There is no guarantee how much you’ll get off the posted rate if you lock in, which is typical for conventional lenders.
The Investors Group penalty on its new variable is not the norm
“What happens if all of the sudden prime starts going up or [long-term] rates start going up, you want to be able to convert,” said Ms. Roberts, noting most contracts don’t specify the rate at which can you convert a variable deal.
Essentially, you can find yourself at the mercy of your financial institution if you want to convert to a fixed rate.
“The big banks start at the posted rate and work their way down on the discount,” says the broker. “Your only option [if you don't like the rate] is to leave and you have a penalty.”
Ms. Roberts said the ability to port a mortgage to a new home can also save you money on break fees. For example, if you sell your house and have say a $250,000 mortgage on it, you can take that balance and apply it to your new loan at your existing rate for the rest of your old term. Any extra balance would become part of a new loan.
Source: Financial Post