It’s closing in on five years now since the Underground Man and I moved into our home. Which means the five-year term mortgage we took out at the time is coming up for renewal. This makes it time for mortgage shopping. Which, in my case, means that it’s time to reach out to my favourite mortgage broker.
But why choose a mortgage broker over just going to your local friendly bank mortgage representative? Many pages of ink have been spilled on this subject, so I won’t attempt to analyze it in that level of detail. What I will do is repeat my favourite mantra – the banks are not your friends.
Banks have posted rates for mortgages. Unless your credit rating is a complete disaster, in which case you probably wouldn’t qualify for a bank mortgage anyway, there is no need for anyone to pay the posted rate for a mortgage. The banks don’t even expect you to pay the posted rate, all you have to do is ask and you’ll be offered a better rate. What the banks count on is a certain percentage of home-owners and buyers who won’t even know enough to ask for a discount off the posted rate. Cha-ching… profit!
Unless your credit rating is a complete disaster, in which case you probably wouldn’t qualify for a bank mortgage anyway, there is no need for anyone to pay the posted rate for a mortgage
Banks will also offer you time-limited special rates for signing your renewal early. That’s because they want you to think there is some false urgency to sorting out your mortgage renewal in advance, so you won’t take the time to shop around for better offers. Don’t fall for the ploy – do some research. Preferably, go to a mortgage broker for competitive offers, letting someone else do the shopping around for you.
Now, just because you take my advice and go to a mortgage broker to negotiate your mortgage, doesn’t mean you don’t still have some due diligence to undertake. This is your money, after all, and no one cares as much about your money as you do. So think through your situation carefully before you even discuss your new mortgage needs, to make sure you are getting the product that suits you best, and not the product that will bring the mortgage broker the biggest commission.
Mortgage brokers will, of course, claim that this is their benefit – analyzing their clients’ needs and recommending the best product to meet those needs. But as in every industry, there are better and worse industry representatives, and when it comes to receiving advice that can be impacted how much the advisor gets paid for providing that advice – well, let’s just say that it always pays to keep an eye on your own bottom line.
Do you think you may be moving in the next few years, either for job, changes in relationship status, or changes to family status? Then perhaps choosing a shorter term mortgage might suit you better than the Canadian standard default five-year term. Or at the very least, make sure you investigate and understand fully what the penalties will be if you need to break the mortgage early.
Check other options also – is the mortgage transferable or portable? When I negotiated my very first mortgage, back in the crazy days of double-digit mortgage interest rates of the late 1980s, the seller had a transferable mortgage offered as an incentive for buying his home, as it allowed me to assume the remaining mortgage, combined with the additional funds I needed to buy, and blend the two into a lower mortgage interest rate than was available from the bank at that time. I’ve known other people who were able to ‘port’ their mortgage from one house to another and avoid paying mortgage-breaking penalties that way. Such features are definitely not available with all mortgage products, and when you hear about super low rate ‘no frills’ mortgages, you are extremely unlikely to get those kinds of features. That is a price to be paid for the lowest rate on the market.
There are other mortgage features which can be interesting, depending on how you manage your finances. For example, there are many banks that offer combination mortgage/home equity line of credit (HELOC) products. For these, essentially, you are qualified to borrow up to the maximum (currently 80% of the appraised value of your home without CMHC insurance) but if you don’t need it all as a mortgage, you can apportion the borrowing amounts into segments, with what you do need to borrow being in the mortgage and having the HELOC available to borrow against when and if necessary. Some of these products are automatically re-advanceable, which means as you pay down your mortgage principal, your HELOC limit rises by an equivalent amount. This is very useful feature for individuals looking at using the Smith Manoeuvre or some variation thereof for investing. This is not a strategy for the faint of heart, but used prudently it is a powerful strategy for investing.