For many brokers out there, quoting a best rate of 2.99% is just a blind subscription to the frenzy that this kind of announcement creates. It’s not always about rate, and for the seasoned brokers that know better, they will advise their clients properly.
Late last week we had a lender, just one, drop their 5 year fixed rate to 2.99% – the first sub-3% rate in many months. It was a draw-dropper that no one was expecting. And it has no doubt garnered a lot of attention from media and clients alike. No other lender, most importantly, the banks, are anywhere close to this rate.
The part that most people don’t realize is that this product isn’t designed for most clients. I take real issue with lenders that don’t offer a full compliment of basic services, and I tend not to use them as often as the lenders that do. In this case, the major feature that is missing is that the lender does not offer bridge financing to their clients.
Now this may not sound important when purchasing your first home, but when it comes time to sell that home and buy another, if your closing dates don’t line up, we will need a bridge. On the surface, sounds like an easy fix but it really isn’t. No bridge financing means paying untimely and probably expensive penalty to the lender to move your mortgage to another lender. Not ideal, and not something that a client wants to be surprised with.
So there is a bit of a risk premium that is being established here. Do I pay a slightly higher rate (maybe 3.19%) with the peace of mind knowing that I won’t have an issue at resale? Will the few thousand dollar penalty I might pay offset the .20% premium (as of today) on my rate?
Using some basic numbers, an extra .20% on a $300,000 mortgage translates into an extra $600 per year in interest. If your penalty works out to be $3,000, which is not uncommon nowadays, then you’d be better off paying the higher rate because in a few years, you would have to pay the $3,000 penalty. Meanwhile, you may have only accrued an extra $1,800 in interest. This is a very simplified example, and truthfully, we can’t predict or calculate a penalty for a sale that may happen a few years down the road.
The normal spread for this lender and others isn’t usually this big. I expect that the gap will shrink as bond yields continue to drop and lenders find more room in their margins with the always busy spring market approaching. Be patient, and ask your mortgage broker the important question, “does this lender offer bridge financing?” If not, it should give you reason to stop and pause.
I never want my clients to become that example of a bad scenario… selling a home a few years down the road and then learning that they have to absorb a hefty penalty because I didn’t advise them properly. If the client is aware of the risks, and is walking into the deal with eyes wide open, then certainly our office can provide this kind of financing. I’ll just discourage them as much as I can as I know it’s not in their better interest and I really don’t want to have that conversation 3 years from now when they sell and can’t line up their closing date. Best rate is 2.99% – I don’t think so. Not best for the client.