When I was nineteen, the brakes on my car seized, damaging the calipers and whatever was left on the rear pads.  I got a quote from a local mechanic chain with both “budget” and “brake” in their name, so I thought they must have the best price on brakes.

At the time I knew nothing about cars, so I called my dad to see if it was a good price.  He offered to cover half the bill if I got six more quotes (six!).  That’s something I was not in the habit of doing, but thought it was worth cutting the bill in half.

Related: Take a day off to work on your finances

Every other place I called offered a better price.  The mechanic I eventually hired finished the repairs the very same day, used better parts, and charged less than half the price that the first place quoted.

Never accept the first offer

My point is, don’t assume you’re getting the best deal just because you’ve been dealing with a company (or bank) for years.

The majority of home owners just sign whatever mortgage renewal rate the bank sends them.  Banks know this, so obviously it’s in their best interest to make you a high-ball offer and see if you accept.

Related: Does my bank deserve my loyalty?

It’s in your best interest to shop the market.  This article will explain how.

A few things to consider when renewing:

  • Are you happy with your current lender?
  • Does your lender give you perks, like free banking?  Figure out the dollar value to make sure it’s worth staying.
  • Do you want to change your payment frequency or amount?
  • Do you want the ability to make lump-sum payments directly to the principal?
  • Can you handle increasing your payments to pay off your mortgage sooner?
  • Would you like to consolidate high interest debt?
  • If you sell, would you like to move your mortgage without paying a penalty?

Sticking with your current lender

The easiest thing to do is to just call your lender and ask for a better rate.  It’s cheaper to keep you as a customer than find a new one.  You’ll have a stronger hand to play if you have a history of paying on time and a strong credit rating.

When you call your lender, ask about special promos they’re currently offering.  Look at competitor’s websites.  If you have time, take your renewal letter to a few banks for a quote.

Switching to a different lender

If you’re considering switching lenders, I’d suggest you chat with a mortgage broker.  Brokers typically don’t charge for their services, but have access to more lenders and better rates than you can find on your own.

Start shopping around early

The good news is, federally regulated lenders must provide a renewal statement at least 21 days before the end of the existing term, so you won’t get a renewal letter the day before your term expires.

The bad news is, three weeks is not really much time to work with.  If you’re switching to a new lender, they usually need at least ten business days to fund a new mortgage.  Add to this the time it takes to gather your documents, schedule meetings, wait for applications to process, etc.

Try to start the process four-six months before your current term ends.  Sometimes new lenders need a property appraisal or some documents you need to pull out of storage.  So leave yourself time for these unexpected delays.

Transfer Costs

Sometimes you’ll be asked to cover administrative or transfer fees.  Depending on the offer, they might be worthwhile to pay.

Shop the market on your terms

Mortgage terms are similar to add-ons when buying a car.  You can save some money if you’re willing to forgo a few comforts.

At some point, you’ve probably seen one of those rate comparison websites, or promotional bank offers.  These deals might be fine if you’re well informed, but most people don’t realize that they come with incredibly restrictive terms.

Common restrictions on discounted fixed-rate mortgages

Statistically, most mortgagees have a five-year fixed rate mortgage, but make changes every three years, so these deals are not for the average home owner.

Related: Pros and cons of going short with your mortgage term

Out of curiosity, I compared the mortgage rates I offer my clients with the lowest discount on the market. The savings worked out to around $12/month, per $100,000 mortgaged.

You might be thinking, “Twelve bucks in my pocket is better than nothing”, which is true, but it’s a pretty meagre savings when you’re staring down the barrel of a five-figure penalty.

If you’re considering a discount mortgage, here are a few of the restrictions you can expect:

  • No porting option: If you want to move, you’ll have to sell your property at arm’s-length, meaning you can’t sell it to a family member.  If you do sell, you pay a penalty; usually interest rate differential (details below)
  • You can’t renew early, pay out, refinance or extend the mortgage: Again, the transaction must be an arm’s-length sale.

If an arm’s-length sale does happen, the penalties are steep.  Penalties are the greater of:

  1. Three months interest, or
  2. The Interest Rate Differential (IRD)

The IRD calculation determines the ‘present value’ of your loan, and then charges you that as a penalty.

With this calculation, your penalty goes up as the current market interest rates goes down, making it more expensive for you to break your term and get a better rate.  This is one reason you might consider a variable-rate mortgage over a fixed.

Example of an Interest Rate Differential penalty

IRD is based on the difference between:

  • The original posted rate from when you took your mortgage.
  • The current mortgage rate offered

NOTE: Some (not all) lenders will choose to post a high interest rate, then offer discounts to be more competitive.  The effect being higher penalties than you’d see with other lenders.

For example, consider the following variables:

  • $300,000 mortgage
  • 5% original posted mortgage rate
  • 3.5% current mortgage rate
  • 40-months remaining on your mortgage

Interest Rate Differential Calculation:

  1. (5% – 3.5%) ÷ 12 months = 0.00125
  2. 0.00125 x $300,000 mortgage x 40 months = $15,000 penalty

Tip for reducing your penalty

Some lenders will let you pay up to 20% of the original mortgage amount directly to the principal.  By taking advantage of this, you can instantly cut your mortgage size (and thus your penalty) by 20%.

Easiest ways to save on interest

When you’re paid on a weekly or bi-weekly basis, paying your mortgage once a month is costing you money.  Accelerating your payments has a huge impact over the long-term.

Assuming your budget can support it, switch to bi-weekly payments and increase the payment amount.  The amount you increase will go directly to the principal, so you’ll end up paying your mortgage down faster.

Related: A new look at the RRSP vs. Mortgage debate

If you find the increased payments are too much to handle, some lenders will let you reduce the payments during your mortgage term.  If you’re considering this, make sure you discuss that with your lender or broker.

Conclusion

I’ll leave you with this summary to help you negotiate your next mortgage renewal like a pro:

  • Don’t accept the first offer.  Always shop around.
  • Take your time to shop and consider your options.  Set a reminder on your phone now.
  • Most people make changes to their mortgage at least once during a 5-year term. Decide what changes you want to make without paying a penalty.
  • Consider what features you want your mortgage to have, e.g., porting options.
  • Increase your payment frequency and amount to pay off your mortgage faster.
  • Consider using a mortgage broker to help you negotiate a better rate.

This post was written by Alan Harder, a mortgage expert in the Vancouver, Langley and Surrey area.  His website is alanharder.ca

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19 Comments

  1. My Own Advisor on July 8, 2014 at 3:45 pm

    I like the last point…they do the work for most of the other bullets.

    IRDs on fixed rate mortgages can be a wealth killer.

    Mark

  2. Dan @ Our Big Fat Wallet on July 8, 2014 at 9:42 pm

    When I negotiated the mortgage for our current house, I had the lender revise the rate (to a lower one) at least twice over the time it was being built. The lender promised the lowest rates and I held them to that by ensuring I got the lowest rate possible at that time (2.6%).

    I agree with Mark, big mortgage penalties can put a serious dent in the net worth.

    Here is a full writeup on how to reduce a mortgage penalty:
    http://www.ourbigfatwallet.com/how-to-reduce-your-mortgage-penalty/

  3. Sam Chamlat on July 9, 2014 at 8:59 am

    “Never accept the first” offer is actually the basic rule, because it is the same principle the basis for negotiation
    very good article

    • Alan Harder on July 9, 2014 at 2:07 pm

      Thanks Sam. It’s such a simple rule that’s too easy to forget.

  4. Bernie on July 9, 2014 at 10:15 am

    I’m retired without mortgage now. During my mortgage days I did very well with using a mortgage broker to get me the best deal. I had two fixed mortgages early on, a one year term and a three year term. Subsequently, I learned it was best to stick with variable terms. That’s what I recommend…employ a mortgage broker (it costs you nothing) & stick to variable terms for lower rates!

    • Alan Harder on July 9, 2014 at 1:57 pm

      I agree wholeheartedly. Aside from a brief window in the 80’s, variable mortgages have been cheaper than fixed, and penalties aren’t as punishing as fixed mortgages.

      Unfortunately, I’ve noticed more people (at least in Vancouver) are opting for 5 year fixed mortgages because they qualify for more. Sometimes that’s the only way they can afford to buy.

  5. Diane on July 9, 2014 at 11:16 am

    I would suggest that when considering your mortgage, figure out how much you can afford at the higher interest rate. Then look at a variable rate mortgage that has the ability to lock into a fixed rate. Set your payments based on what the payment would be if you locked in on a fixed rate that is 1% higher than it is today, but make those payments on the variable rate mortgage. That way if rates start to rise, they haven’t for a while, but surely will at some point, you can lock in and still afford the new rate. In the meantime you will reap the benefit of the lower rate on the variable rate mortgage and be putting more down on the principal. This is an option that I would want to ensure was available on any mortgage I negotiate. We have had our mortgage for almost 3 years at prime -.85%. This has reduced our principal significantly and I’m glad to say that we have had no need to lock into a fixed rate.

    • Alan Harder on July 9, 2014 at 2:22 pm

      Great point. I did a quick calculation; with the qualifying rate being 4.79% and the 5 year variable mortgage being prime-0.50%, you’d cut roughly 8 years off a 25 year amortization by keeping your payments at the 4.79% level. Not bad!

  6. Jim O'Marra on July 9, 2014 at 12:38 pm

    The IRD that I’ve been seeing is the difference between the rate you are paying vs. the posted rate at the time that you terminate the mortgage. Therefore, if the lender is posting higher rates than what they will actually lend you the money for, the interest penalty will only be three months interest because the posted rate is higher than the rate that you are paying. This makes breaking the mortgage early a very inexpensive proposition.

    A year ago, I had two years left on a 3 year fixed mortgage at 3.1%. I had secured this mortgage through a broker. I received an offer from CIBC for the same rate with a $ 12,000 cash back offer. The three month interest on my $ 400,000 mortgage along with all the admin fees from the mortgage company that I was leaving was just over $ 2,500. So I changed my mortgage over and ended up with $ 9,500 in my pocket.

    The only difference in the terms with the new mortgagor was that I can only pay down 10% per year. No penalty to port the mortgage to a new property at all.

    So there are some crazy deals out there if you keep your eyes open.

    • Alan Harder on July 9, 2014 at 1:33 pm

      Hey Jim,

      Sounds like you made a smart move, switching to CIBC!

      You’re right, there are some fantastic deals out there. Most of my monoline lenders have posted rates around 3.19%, which I think is pretty reasonable.

      If you take a look at some of the big banks, the posted rate on 5yr-fixed is ~4.99%. BMO’s recent 2.99% 5 year fixed deal had no porting option, so it’d be painful to walk away from that!

    • Bernie on July 9, 2014 at 2:06 pm

      The very best deals can only be acquired through a mortgage broker.

      • Alan Harder on July 9, 2014 at 2:14 pm

        Absolutely! Mortgages are a big, intangible expense. The benefit of hiring an industry professional to have your back is well worth the $0 price tag 😉

  7. Paris on July 10, 2014 at 9:20 am

    Alan, can you comment on the size of mortgages you are seeing being taken out these days in the Vancouver, Surrey and Langley area? I have searched many websites for the answer. Due to the high prices are houses in this area, I am wondering about mortgage to house value proportion. How many people are signing up for a $250K mortage yet have a home worth $1.1M …. Or having a $250K mortgage on a home in Surrey/ Langley in the Cloverdale or Willoughby area worth $550K or $650K or $750K… Or having a a home in Vancouver for $1.5M but a mortgage at $800K… Or a $1.2M house with a mortgage of $1M. I hear a lot about how much someone’s home is worth and how much it’s appreciated in the Lower Mainland…. But I never get a sense of how much they still have to pay off on the mortgage. You can have a $1.2M or $1.6M house which sounds amazing but do these folks have a mortgage off $1M or $1.5M on those homes? …l and do they ever mean to pay off their mortgages in full?

  8. Liz @RateSpy on July 14, 2014 at 9:48 pm

    No matter where you plan to get your mortgage, if you’re well qualified always consult a rate comparison site. Examples include ratespy.com, ratehub.ca, ratesupermarket.ca and a host of others. Compare what’s out there to see how low various providers will go. Then use that information as leverage with your broker, bank or credit union.

    One tip: If you’re looking at the lowest rates on these sites, remember that they often come with few frills. Add appropriate rate premiums (10+ basis points, i.e., 0.10%) if you want more service, more advice, more mortgage flexibility, a big bank brand and so on.

    Happy mortgage shopping!

    Liz

  9. Mortgage Bridge on February 26, 2015 at 11:41 pm

    Good post, really its very helpful for choose best mortgage agency in Canada. After read the article, anyone can understand the your seance and select the best mortgage agency.

  10. MK on October 15, 2015 at 12:09 pm

    I have two mortgages with the same bank, two different interest rates. I moved a mortgage when I bought a new home because I had a great rate. The second mortgage is at a higher rate. To break my mortgage that is not up for renewal for another 4 years it will cost me $800 (3 months interest). Can I ask my bank to waive that fee and refinance my house under one mortgage with a better rate if I am willing to take my business elsewhere?

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