Recent musings at Blessed by the Potato about BMO’s 2.99% closed 5-year mortgage offering made me wonder about the possibility of running an arbitrage with a mortgage and a GIC.
Outlook Financial offers a 5-year GIC at 3.10%. It would seem that if you owned your home outright you could take out a mortgage, put the proceeds in a GIC, and make a free 0.11% per year for 5 years. On a $250,000 mortgage, this would be a total of about $1375. This won’t make you rich, but it’s not trivial.
There are a number of potential problems here. For one, the fine print on the BMO web page includes “If we require you to obtain an appraisal, the appraisal fee would increase your APR.” So, you may not be able to get 2.99%.
Another potential problem is hidden compounding assumptions. In Canada, most mortgage rates assume semi-annual compounding. This means that 2.99% is really 1.495% every 6 months. This compounds out to 3.012% per year. I was once offered a variable mortgage by BMO where the rate assumed monthly compounding. If that applied here, the compounded rate would be 3.031%. It could be that Outlook Financial’s GIC rates have built in compounding as well. In the end, I’m not sure what actual arbitrage spread is available.
A third potential problem is insolvency. Outlook Financial is backed by the Deposit Guarantee Corporation of Manitoba (DGCM) and not the Canada Deposit Insurance Corporation (CDIC). At a 0.11% spread, if the odds of losing your GIC money within 5 years are more than 1 in 900, this arbitrage is definitely not worth it. How much lower the odds have to be for this arbitrage to makes sense is a personal choice.
The potential gains aren’t enough to entice me to try this arbitrage, but it makes me think.