Battle of the lenders is over: CIBC gets the win

You may recall I’ve been chatting with a couple of banks about a mortgage renewal that’s coming due in July. It was a tough haul and the going got tougher as banks continued to hike their rates over the last few weeks. I’ve made a decision. I’ll be switching my mortgage from my current lender (MCAP) to CIBC.

My mortgage with MCAP is now at variable, currently at 1.4%.  Sweet deal huh? Not going to continue to see that rate as the Bank of Canada increases the overnight lending rate starting in June.

My options on the table were to:

  • go with either lender at variable, and ride out the rate fluctuations
  • go with MCAP at their fixed 5 year offer of 4.39%
  • switch to CIBC for their fixed rate of 3.75%
  • switch to CIBC for their fixed rate of 3.95%, get 1% cash back and pay a penalty for breaking the existing mortgage early with MCAP
  • switch to CIBC for their fixed rate of 3.99%, get 2% cash back and pay a penalty for breaking the existing mortgage early with MCAP

Yep, it’s a lot of options.  I’m a huge fan of variable rates. I tend to prefer it. However, since I am rock solid sure the Bank of Canada will start to increase rates, and since I’m not rock solid confident in my ability to weather too many financial storms, this time I’ve opted to fix the rate. The decision to lock the rate is based entirely on risk.  Right now, I’m going to play the conservative card.

I’m left with four fixed rate options. Since there’s any number of ways to evaluate this, I thought I’d conduct my analysis on the total interest paid in all scenarios. For the sake of comparing apples to apples, I included the penalty for breaking my mortgage early as interest, which is $908. I’ve just considered any money that just goes to the bank to be interest.

Option a) stay with MCAP at their offer of 4.39% means I’d pay $27,289 of interest over 5 years.

Option b) switch to CIBC for 3.75% would have me pay the least amount of interest, at $22,884 (no penalty for this option).

Option c) switch to CIBC at 3.95% for 1% cash back would cost $25,500 over five years, and put about $1400 in my pocket (of which, I’d have to use $908 to pay the penalty).

Option d) switch to CIBC at 3.99% for 2% cash back would have me pay $25,735 over five years, including the penalty from MCAP, and put $2880 in my pocket (of which, I’d have to use $908 to pay the penalty)

Option d) gets the win for me. Although it isn’t the lowest interest to pay over 5 years, it is still lower than my current lender is offering me, and it’s still an attractive rate at 3.99%. The $1900 that I’ll net from the cash back option, after I pay the penalty will go toward my line of credit. Remember I said I wanted to consider interest paid as my criteria?  My line of credit is at 7% now. With the overnight lending rate virtually guaranteed to increase in June, I want to pay as much against the line of credit as soon as I can. The Bank of Canada overnight lending rate will impact the interest rate on my line of credit.

Bet you thought I’d take that money and buy an electric bike huh?  Don’t think I haven’t thought about it! I just can’t do it.

I hear Gail Vaz-Oxlade in my head reminding me I can have anything I want, as long as I can pay for it.  Seems that line of credit balance is telling me I have things now I haven’t paid for, so I’d better clear that up before I get all excited about looking like Audrey Hepburn riding down the street on an ebike with a scarf blowing behind me.

When I do this switch and transaction, I will be assured that my line of credit debt will be retired in 2010. Unless, of course, there is some new crisis yet to unfold. Knock on wood.

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3 responses to this post.

  1. I think you made a wise choice!
    Good for you!!!

    We also have a fixed rate mortgage – interest rate is higher than yours but at the time (2006) it seemed the safest thing to do and I sleep well at night even though my interest rate is and has been significantly higher than the going rates these days. I know we can afford our monthly mortgage cost and I don’t worry about rising interest rates and that’s what counts right now.

    Reply

    • Thanks! I appreciate your feedback. Of course it’s nice to get feedback that agrees with my choice! It was a tough one for me, not just taking what appeared to be the least costly over 5 years without trying to also weigh some shorter term benefits.

      Reply

  2. I think you were smart to lock things in, even if it meant changing lenders. Since I locked in for five at 3.75%, BMO has gone up to 4.35%. It’s only been a month. The cashback sounds fun. I know I’d want to get something with it but with the way my mind seems to work these days (thanks to Gail) I probably would put it down on a loan, mortgage or in my EF. LOL

    Reply

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