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.
Important Announcement: due to the latest changes in international lending standards IFRS9 (International Financial Reporting Standards) that will be coming into play at the end of 2018, homeowners with weak credit, spotty employment or declining property values may not qualify for automatic renewal. Read this article about tough renewals instead.
Coming back to strong borrowers:
Rob McLister former editor in chief of Canadian Mortgage Trends a few years back wrote “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 is 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; 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. I rely on other great brokers like Rob McLister, Dustan Woodhouse and Dave Larock for inspiration and some of the following may be ideas borrowed from one of them.
TIP #1 – Don’t sign your renewal letter or agree to an early-renewal without doing some research and talking to your mortgage broker
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.
In fact online rate information is misleading more often than not – since there are now several different categories of borrower for each mortgage lender; yet the rates you will see are invariably for hi-ratio, CMHC insured mortgages for the purchase of a new home. This is a pretty narrow segment of the market.
It reminds me of the bad old days of car advertising when cars were advertised at really low prices, but they assumed manual transmissions (which hardly anyone took) and manually operated seats and windows (same).
Different Rates For Different Folks
Any given lender or mortgage broker will be able to tell you their best rate for:
- Hi ratio purchases (insured)
- Conventional purchases (at least 20% DP) under one million dollars
- Conventional purchases (at least 20% DP) over one million dollars
- Transferring or switching mortgage lenders with no new money or changes in terms. Rate may depend on whether or not this mortgage is “insurable”.
- Such rates are often higher than purchase rates.
- Rental Properties. Such rates are higher than owner occupied properties.
- Bad Credit Mortgages. Now you are in the world of alternative lenders.
- Self Employed Mortgages. Best you just ask if this is you.
They’re all different, so ask your mortgage broker or trusted advisor which rates might apply to your situation.
TIP #2 – Ask 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 45 days to get the best rate if there are promotions out there
- 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 downsize, 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 #3 – 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 brokers 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!
Ok, but are there any fees in switching?
Great question and here are three scenarios
If you are switching your mortgage at renewal time, in most cases there should be no out of pocket expenses other than a modest discharge fee from your current lender.
Any legal and appraisal costs are typically picked up by your new lender or mortgage broker. And if your mortgage size is husky, your broker may chip in towards the discharge fee too.
There is no prepayment penalty at renewal. You truly are a “free agent”.
Most mortgages are registered simply as a “standard charge”. But some banks and other lenders register their mortgages as a “collateral charge”
Rob McLister does an excellent job of explaining the difference in this article . He wrote:
“A collateral charge is a method of securing a mortgage or loan against your property. It differs from a standard (traditional) mortgage in two very important ways:
- Unlike a standard mortgage, a collateral charge is re-advanceable — That means the lender can lend you more money after closing without you needing to refinance and pay a lawyer.
- A collateral charge is non-transferable — It cannot be assigned (switched) to a new lender like a regular mortgage.”
That article was written several years ago, and things have changed in that now some lenders will allow you to switch your collateral charge mortgage to their standard charge mortgage. In this case, there may be some legal fees to pay. Again, if your mortgage size is husky, your broker may chip in towards those.
There is such a difference between the terms of your current mortgage and the one you are now being offered that you are seriously thinking of breaking your current mortgage and switching lenders now.
It will come down to if the math makes sense to consider breaking your current mortgage now to capture a great offer on the table. Again, your mortgage broker can help you by demonstrating the financial benefits of the early renewal mapped against the prepayment penalty on your existing mortgage.
Unfortunately, no two lenders use the same approach to calculating the prepayment charge, so make sure you have a good handle on that number before you proceed.
Real Life Client Question
Last week a client wrote me in follow up to my comments that switching a lender may be beneficial. He worries if you switch your mortgage at renewal then you lose all the benefits you accrued with your current lender.
“These articles are great and are similar to other info available about shopping for best rates. However, what no article ever seems to discuss is the fact that when you switch mortgage lenders, you start your term all over again and most of what you pay goes to interest? If you stay with your current lender, then you start to have more principal paid? If I’m wrong, please advise. We still have 2 years to go on the mortgage you placed for us and have begun to think about things such as the above questions.”
Thank you very much for reading my articles and writing to me. Fortunately, when you switch lenders at renewal, things are not reset – you pick up exactly where you left off in terms of the remaining amortization period.
The actual interest rate at renewal will determine what percentage of each payment is principal and what part is interest, but the result will be identical whichever lender you are with (if interest rates were the same).
Presumably though if I am arranging a switch for you it is because we feel we can get a lower interest rate with the new lender, so in fact, you will pay less interest and more principal with that new lender.
And if we make no changes to your existing mortgage (in terms of the amortization period, loan amount etc.) you will incur no costs in making the switch, other than a mortgage discharge administration fee of around $250 from your current lender. And even that can be covered by the agent arranging your new mortgage.
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.
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.