Canadians haven’t seen inflation like this in three decades. So while it may not be a high probability, we can’t discount the possibility that rampant inflation drives interest rates to highs we last saw in 2007, at the beginning of the global financial crisis.
That sheer prospect of higher-than-forecast rates will compel a growing number of mortgagors to seek more rate security.
Banks know this. And now one of them – HSBC Canada – is betting that mortgage shoppers will want even longer rate protection than a five-year fixed.
HSBC is trying to mitigate rate risk with new seven-year fixed offers of 2.69 per cent (default insured) and 2.94 per cent (uninsured).
That’s about what you’ll pay for the lowest nationally advertised five-year fixed rates. But unlike the five-year fixed – which is historically Canada’s most popular mortgage term – a seven-year gives you a guaranteed low rate all the way to 2029.
Locking in for seven years has historically been a sucker’s bet, but it’s worth another look.
How good is this offer?
HSBC has built a reputation for undercutting Canada’s Big Six banks and this special is no different. With all the majors now quoting five-year fixed rates of more than 3 per cent, a seven-year at 2.69 to 2.94 per cent is additional rate-hike “insurance” for less money.
It’s also far more economical than 10-year mortgages, all of which are at least 30 to 40 basis points more expensive per year. (There are 100 basis points in a percentage point.)
But you seldom get something for nothing. Seven-year rates have one critical string attached – their penalty.
By law, that penalty is capped at just three-months of interest after five years.
But heaven forbid you terminate the mortgage before five years, and interest rates are materially lower than they are today. (The more rates drop below your contracted rate, the bigger the gap between what your lender lent to you at, versus what it can lend to new customers at.)
Suppose you got a $400,000 seven-year fixed three years ago, for example, and you needed to break your mortgage now at today’s lower rates. According to HSBC’s prepayment calculator, you could potentially pay more than $27,000 to get out of the contract. That’s roughly eight times a standard 90-day interest penalty – painful.
Who it’s geared to
Not everyone cares about penalties, including people with no intention of breaking their mortgage in the next half-decade.
With Bank of Canada Governor Tiff Macklem projecting “multiple” rate hikes amid 30-year highs in inflation, this is a “sleep-well-at-night rate for those who get nervous about where rates end up in the future,” says Jonathan Bundle, head of mortgages and secured lending at HSBC Bank Canada.
If you ride out the term for at least five years or break when rates are higher, you’re looking at a relatively painless 90-day interest charge.
You can avoid penalties altogether if you port the mortgage to a new property and/or refinance with HSBC using its Equity Power Mortgage. Both these scenarios let you add more borrowing without needing to break your existing term. Moreover, unlike most big banks, ports and increases get HSBC’s transparent online-advertised rates, which have generally led major lenders for years.
Just remember, porting and refinancing require you to qualify for the mortgage all over again. So, it’s vital that your income, debt load (relative to income) and credit remain solid.
Who it’s not geared to
If there’s a meaningful chance you may need to exit your mortgage before five years, run from this offer.
It’s likely that rates will dip again before 2027. In fact, if they don’t, it would be the first time since the Bank of Canada started inflation targeting that its overnight rate rose more than 75 basis points without reversing before five years. Not surprisingly, a seven-year fixed has never beaten a variable rate over a five-year span.
Seven-year terms are especially risky for anyone who might need to refinance and have problems requalifying for a mortgage in the next five years. If such a borrower were forced to refinance at a non-prime lender, for example, the last thing they’d want is a five-digit prepayment charge.
“It’s not going to be the right rate for everybody,” but “if you’re in your forever home, seven years is not a daunting term,” Mr. Bundle summarizes.
Indeed, if you absolutely need the cheapest long-term rate security, and this mortgage fits your five-year plan, it’s a potential fit.
And that comes from someone who has long scorned seven-year terms.
Fixed rates defy gravity again
Five-year fixed rates crept another five basis points higher in the past seven days, increasing their premium over variable rates to a substantial 155-plus basis points.
Rates shown in the accompany table are as of Friday from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20-per-cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases of more than $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
Robert McLister is an interest rate analyst, mortgage planner and contributing writer for The Globe and Mail. You can follow him on Twitter at @RobMcLister.