There are essentially 3 tiers of mortgage rates.
Tier 1: - Tier 1 does not mean the best, just the first one to discuss - These are your ultra-low rates you see commonly advertised online - We don't recommend them. They are heavily restricted (as mentioned previously) - No back-end systems to view your mortgage
Tier 2: - Commonly known as broker wholesale lenders - Great rates, no restrictions with maximum pre-payment options - More advanced back-end systems to view your mortgage - LOC options available but rare
Tier 3: - Enter the big banks. Rates are often a little higher or at par with Tier 2 - Pre-payment options are the same or less than Tier 2 - Collateral mortgages are common here - Most advanced back-end systems - IRD penalties (on fixed rates) are at the highest level. Sometimes 3 times higher than Tier 2 - Have LOC options with pretty much every lender here
IRDs (interest rate differentials) are the big banks way of getting more money out of you. We honestly don’t understand how their penalty calculations are legal. They shouldn't be. Always err on the side of caution when selecting a fixed rate product and know who has high IRD’s because they can be disturbingly expensive. In many cases, you don’t be able to cancel your mortgage or sell your house.
To choose Fixed or VRM: the great debate. First off, fixed rate mortgages allow you to sleep better at night with a fixed / frozen rate. However, they are generally more expensive. Historically speaking, the variable rate mortgage (VRM) out preforms the fixed when it comes to interest rate savings. That’s over the past 30 years but it doesn’t mean it’s the best option for the next 5 years.
A huge benefit to the VRM is you can generally lock in at any time (convertible mortgage). The penalty to cancel a VRM (prior to locking in) is only a 3 month interest penalty, so this is by far the most flexible closed mortgage.
Fixed rates are dictated by the bond yield. Watch it live here: http://www.investing.com/rates-bonds/canada-5-year-bond-yield</a>
Variable rate mortgages are dictated by the Bank of Canada’s (BoC) overnight lending rate. This is essentially the rate banks use to decide how they are going to set their Prime rate. VRM’s are generally plus or minus Prime.
Lenders basically get wholesale funds and generally jack up 1-2% to earn revenue from you, the borrower. Too bad we can’t get these wholesale funds but they buy them in bulk!
Side note: Please understand that the rate you have today could be much higher at renewal. Just because you paid your mortgage down doesn't mean at renewal your payment decreases. Plan ahead and think into the future. Protect yourself from payment shock!