The convenience of auto-renewing your mortgage is compelling, but may be a very poor financial decision on your part. The mortgage industry is changing rapidly, and for strong borrowers, it really is a buyers’ market. It just takes a little extra effort on your part, and you may save yourself thousands of dollars.
Rob McLister editor in chief of Canadian Mortgage Trends wrote “According to a recent (2013) Maritz/CAAMP survey, only 56% of borrowers negotiated their mortgage rate at renewal. A remarkable 4 in 10 took the first rate their bank offered”
Many of us tend to become complacent about our mortgage. It’s taken for granted and not much thought given to it. A few months before our mortgage is due to renew, a letter from the mortgage company arrives in the mail, offering a simple, hassle-free renewal process. The letter showcases the lender’s offers, and invites the borrower to select the best one; sign and return. Everything is taken care of. No muss no fuss.
You may even be contacted several months in advance, inviting you to renew early, and lock in today’s great rates. Car leasing companies are doing this too – why wait until the customer has other product alternatives – make an offer now before the customer has the freedom to leave.
It’s all about customer retention; and it’s designed to appeal to our inner couch potato
So if you want to put more effort into your mortgage renewal than you normally do, here are some tips to get the most out of the experience.
TIP – Don’t sign back your renewal letter or agree to an early-renewal, without doing some online research
Today if you go online and check out the banks, brokers and rate sites you will find five year mortgage rates quoted as high as 3.44% and as low as 2.39%; all targeting the same customer. That’s a staggering variance; imagine shopping for a new car and finding ads offering essentially the same model at prices between $20,000 and $30,000.
Online research at least tells you what’s out there. Chances are there are readily available lower rates than your present lender is offering you. But keep in mind the information you find is not necessarily up-to-date, accurate, or binding on the lender. And there may be restrictions to the rate offer which make it unacceptable to you.
TIP – You should ask if there if there are any limiting conditions of a low rate offer
Some examples might be:
- If you have to sell or refinance your property, what would the prepayment penalties be?
- Can you leave the lender mid-term? (Historically, the actual average duration of a five mortgage is around three and a half years, so this is an important question)
- Your mortgage is closing in 30 days to get the best rate
- If rates drop further before your closing date, you might not get a rate reduction
- Is this the actual rate you are getting, or are you being offered cash to lower the effective rate?
- Payment top up and annual prepayment privileges
- Who is going to pay for any appraisal, discharge or legal costs?
You may not care about any of these points, or one or two may be extremely important to you. Imagine you plan to retire in 2 years and down size, and then you find out the prepayment penalty on your variable rate mortgage is 3% of your remaining balance, and not three months’ interest.
TIP – Now you have to decide your next move
- You could contact your lender and request they match the offering you found with your homework. Sometimes they do match, or at least lower their offer, when pressed. We all know it’s much cheaper to keep an existing client happy than to source a new one.
- Or you could ask yourself, why do I have to negotiate with my existing lender simply to get the fair market rate for my mortgage? It feels the same as when I go to a car dealership and I have to go through the “sales manager waltz” to get what may or may not be a decent price for my new car.
- Or you could move your business elsewhere and save yourself thousands of dollars. Mortgage agents I know tell me their average mortgage transaction is $360,000. Over five years, the savings from a small interest rate difference of only 0.2% is over $4,200!
You really do owe it to yourself to proactively manage your mortgage renewal. I am not saying you can simply look up the lowest offered rates online, and strong arm your bank, mortgage lender or broker into matching that rate. It often isn’t possible. But at least you will alert them to the fact that the best possible rate for your circumstances is a high priority.
Related Article: Mortgage switch at renewal is free
That won’t be news to your mortgage broker; who presumes this right from the get-go. And it will give your present mortgage lender a wake-up call. At the end of the day, you will choose for yourself the right balance of cost savings, comfort, convenience, mortgage features, and service.
Ross Taylor is a mortgage agent with Mortgage Intelligence