Promotional / Teaser Mortgage Rate: Conditions and Pitfalls

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Promotional Mortgage Rate: An Enticing Offer That Requires Careful Analysis

Promotional mortgage rates attract the attention of Quebec borrowers with their appealing numbers, often well below prevailing market rates. These offers are a powerful marketing tool used by lenders to acquire new clients or stimulate activity during slowdowns. However, a low teaser rate does not guarantee a lower total cost over the term. A thorough analysis of the conditions is essential to avoid unwelcome surprises.

How Does a Promotional Rate Work?

A promotional rate is a reduced interest rate offered for a limited period at the start of the mortgage. Upon expiry of this period, the rate is adjusted to the standard rate specified in the contract. The mechanics vary by lender: some offer a fixed discount during the first months of the term (for example, a 1.00% reduction for 12 months), while others offer a promotional rate for a full but short term (1 or 2 years), after which the borrower must renew at market conditions.

Promotional rate (teaser rate): A temporarily reduced mortgage interest rate offered by a lender to attract new borrowers. The promotional rate applies for a limited duration, after which it is replaced by the lender's standard rate or the contractual rate specified for the remainder of the term.

Common Pitfalls to Watch For

High post-promotion rate: the rate that applies after the promotional period may be higher than what you would have obtained with a standard product, cancelling the initial savings.
Portability restrictions: some lenders prevent transferring the mortgage to another lender at renewal, forcing you to accept the offered conditions or pay discharge fees.
Increased prepayment penalties: more severe penalties may apply if you break the mortgage during the promotional period, including repayment of the promotional discount.
Product bundling: some lenders condition the promotional rate on subscribing to other products (mortgage insurance, bank account, credit card), increasing the overall cost.
Clawback clauses: some contracts stipulate that if the mortgage is repaid or transferred before a specified date, the borrower must repay the promotional benefit received.

How to Evaluate the True Value of a Promotional Rate

Calculate the total interest cost over the full term: Add up the interest cost during the promotional period and the interest cost at the standard rate for the remainder of the term. Compare this total with the interest cost of a regular-rate mortgage for the same duration.
Verify all conditions and restrictions: Ask your AMF broker to provide a complete list of conditions associated with the promotional rate: penalties, portability, prepayment privileges, product bundling, and clawback clauses.
Assess your holding horizon: If you plan to sell the property, refinance, or break the mortgage before the end of the term, the restrictions associated with the promotional rate could cost you more than the savings achieved.
Compare offers from multiple lenders: Do not limit yourself to the promotional offer. Ask your broker to compare at least three offers from different lenders, including lenders offering competitive regular rates without restrictive conditions.

Frequently Asked Questions

How long does a promotional mortgage rate last?

The duration varies by lender and product. The most common promotions last 6 to 12 months, after which the rate reverts to the standard rate. Some lenders offer promotional rates for full 1- or 2-year terms. Always verify the exact duration of the promotion and the rate that will apply afterward.

Is a promotional rate always advantageous?

Not necessarily. If the rate after the promotional period is significantly higher than the regular market rate, the initial savings may be cancelled or even become an additional cost. It is necessary to calculate the total interest cost over the entire term, not just during the promotional period.

What restrictions are commonly associated with promotional rates?

Restrictions may include: higher prepayment penalties, inability to transfer the mortgage to another lender at renewal, reduced prepayment privileges, or requirements to hold other products with the lender (bank account, insurance). Your AMF broker must disclose all of these conditions.

Does a promotional rate affect my mortgage qualification?

In Canada, the OSFI stress test requires borrowers to qualify at the higher of the contractual rate plus 2% and the floor qualifying rate. The promotional rate therefore does not affect qualification since the stress test is based on a rate higher than the promotional rate.

Can I negotiate a better rate at renewal after a promotional rate?

Yes, at renewal you can negotiate a new rate or transfer your mortgage to another lender, provided the original contract does not contain restrictive clauses. Start shopping at least 120 days before your term maturity to maximize your negotiating power.

How do I compare a promotional rate with a regular rate?

Calculate the total interest cost over the full term for each option. For example, a promotional rate of 3.99% for 6 months followed by 5.50% for 54 months may cost more than a fixed rate of 4.89% for 60 months. Your mortgage broker can perform this comparative calculation for you.