Low mortgage rates may be masking high fees

TORONTO – Online comparison shopping is changing everything from how we buy a new television set to how we select a mortgage, and it’s causing some mortgage lenders to get creative in order to compete.

“Lenders are stripping away features of mortgages to get their rates lower,” says Steve Pipkey, co-founder of Spin Mortgage.

Consumers have always been keen on scoring a low mortgage rate, but the ease with which they can comparison shop via their computers, smartphones and tablets has created an even greater fixation on the headline number, above all else.

“The majority of our phone calls are about rates these days, whereas before it might have been more about, ‘How can I get my money out fast?’ or ‘What’s the quickest way to refinance my home?’” says Bob Aggarwal, president of Canadalend.com.

Brokers say the push for low rates is not a bad thing, but it has led to some confusion. While mortgage contracts used to be fairly standardized, many of them now contain various conditions and clauses, and in some cases it’s hard for consumers to decipher the difference between various products.

“If you’re online trying to figure out what the rates are and why, good luck to you,” says Pipkey. “Some banks and brokers are better at disclosing the fine print than others.”

In some instances, in exchange for a lower rate, lenders are adding steeper penalties for paying off a mortgage early. By chasing those five extra basis points, buyers put themselves at risk of having to pay thousands more in penalties later on down the road, says Pipkey.

Prepayment privileges also allow borrowers to pay more than their regular mortgage payments without penalty in order to get out of debt faster. But some lenders may reduce how much money borrowers can repay in exchange for a rate reduction.

Pipkey says it’s not surprising that lenders are lowering their rates given how competitive the mortgage market has become.

“Mortgage originations are down and lenders are fighting for market share in the face of compressing margins,” he said.

Bill Whyte, senior vice-president and chief of member services at Meridian Credit Union, says it’s hard to attract clients unless you offer a competitive rate that will grab the attention of borrowers.

The credit union recently offered, for a limited time, an 18-month mortgage for an eye-grabbing 1.49 per cent.

“To our knowledge, when we offered it, 1.49 was the lowest in Canadian history,” said Whyte.

“It drove a ton of traffic to our contact centre, our website and our branches.”

However, many borrowers who phoned to discuss the offer ended up going for a five-year mortgage at a slightly higher rate instead, he said.

“In a lot of cases the five-year rate fit them better, and some of that initial interest in 18-month was diverted to five-year,” he said, adding that many Canadian borrowers are looking to lock in at today’s rock-bottom interest rates before they climb higher.