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:
- Three months interest, or
- 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:
- (5% – 3.5%) ÷ 12 months = 0.00125
- 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
