A wise friend told me this, “It’s very easy to enter into a contract, but what you should know is what it takes to get out of your contract”. This is also true of Variable Rate Mortgage contracts.
Here’s the thousand’s of dollars question with Variable Rate mortgage contracts with Royal Bank, CIBC, and other Big 5 banks, “If I decide to convert my Variable rate mortgage to a fixed rate mortgage, what rate am I converting the mortgage to at the time, your posted rate or some other rate?” The standard charge mortgage terms of the banks(signed with the lawyer) are very vague in that they say you will be able to convert it to a fixed rate based on the rate in effect at the time. Royal Bank has a posted 5 year rate today at 4.66%, good luck finding that on their website. Royal Bank does offer a 5 year rate special of 2.69% but wait, is that the “rate in effect at the time”? In most cases that answer is no, so I’m going to share a sales tactic that a bank used recently with someone I talked to.
Bank Customer: “So if I’m in a variable rate mortgage and I want to convert it to a 5 year fixed rate today what rate would you give me in writing.”
Bank: “Well I guarantee you the posted rate (4.66%) in writing for a new 5 year mortgage but I have another idea. You can always pay your 3 months of interest penalty and then I can offer you our interest rate special for arranging a new mortgage subject to qualification at the time.
Bank Customer: “So I have to pay a penalty to get a better rate and requalify to get the better rate.”
Here’s a scenario played out with the same question with lenders that I have access to that don’t have posted rates:
Bank Customer: “So if I’m in a variable rate mortgage and I want to convert to a 5 year fixed rate today what rate would you give me in writing.”
Daryl the Mortgage Broker: “I have some lenders that only operate in the world of discounted rates, they don’t have posted rates. Today’s rate with one of these lenders is 2.69% for a 5 year term, yes it’s even on their website and in the contract that you can convert it to their current website rate. We can make a call, sign a form and your mortgage can be converted to fixed rate right away at no cost.
Understanding your contract is always so important, that is why we always read it and understand it, right?