Why pay for something you don’t use? That’s the idea behind Merix’s new “No Frills Mortgage.”
The No Frills is a product designed for people who know they’ll never take advantage of pre-payment privileges, and would rather have a lower rate instead.
Before we get into the details, however, first a few general comments…
No frills mortgages have been around for a while, but always as private labeled products. For example, Mortgage Alliance launched one last fall (backed by Macquarie) and Reactive Mortgages has offered one backed by INALCO.
It’s a smart concept from a marketing standpoint, and Merix is brilliant for being first to offer this product to the industry as a whole. As most of you know, borrowers are extremely rate sensitive these days. Homeowners increasingly think of mortgages as commodities, despite facts to the contrary. So when they see a rate 10 basis points below the market, their eyes open wide.
In some cases, bare bones mortgages serve as a lure to get clients in the door. Once the client and lender/broker strike up a conversation the talk often changes to options and privileges, and those usually come with a cost. Many clients interested in bare bones mortgages therefore end up walking out the door with a more fully-featured mortgage at a higher rate (no, this doesn’t necessarily mean higher compensation for lenders/brokers).
In terms of stats, the numbers support bare bones products. Merix cites statistics that only 33% of Canadians make lump sum prepayments, based on a recent CMHC study. Accelerated payments are more prevalent, with 45% of Canadians making them.
OK. Back to Merix.
Here’s a quick rundown on the new No Frills Mortgage:
- The product is designed for:
- First time homebuyers with limited ability to prepay
- People who want a readvanceable mortgage with a low-rate fixed portion that won’t be prepaid
- Property investors who don’t care about pre-payments given their deductible interest and cash flow needs
- The rate: 5.19% (as of today)
- No lump sum prepayments without penalty (3-months interest or interest rate differential, plus 0.25% of original mortgage amount times the number of months remaining in term)
- 10% annual payment increases are allowed (on the mortgage anniversary)
- Accelerated weekly or accelerated bi-weekly payments are allowed
- 30-day rate hold maximum
- No pre-approvals
- 95% loan-to-value maximum
- Up to 40-year amortizations
- The interest rate, term, and possibly insurance premiums can be ported without penalty to a new No Frills Mortgage on a new property
Now that this product is out there you might see a lot of 5.19% fixed rates pop up on brokers’ websites. If you’re a typical homeowner that cares about pre-payments (we hope you do!), make sure to ask your mortgage planner if his or her rate quote includes pre-payment privileges.
If you don’t care about pre-payment privileges (we won’t scold you if you don’t), then Merix’s No Frills Mortgage might be right up your alley.
There is a real reason behind this product’s lower interest rate. Mortgages are typically purchased by investors. Investors don’t like uncertainty. Therefore they don’t like the possibility of borrowers pre-paying their mortgages and reducing the investor’s income stream as interest rates fall. As such, investors need a hedge against the probability that people will pay down their mortgages early.
In addition, lenders hedge to lock in rates before closing.
There is a cost to all this, and that cost is reduced or eliminated with a no frills mortgage. Hence, lower rates to the consumer.
Side Bar II:
According to one source…
- A 30 day rate commitment may have a 65% probability of closing and an average closing period of 20 days.
- A 45 day rate commitment may have a 50% probability of closing and an average closing period of 35 days.
- A 120 day rate commitment may have a 40% probability of closing and an average closing period of 52 days.
Each of the above has it’s own cost that is built into the respective mortgage.