A guide to home mortgages and the best option for you

How to get the best possible mortgage rate

Here are some tips to get the best possible rate for your home mortgage:

• Remember that posted bank rates are often not the lowest out there.

• Consider going beyond your financial institution and talk to an independent mortgage brokerage firm. They will often be able to not only match the posted rate but be able to offer you a lower rate, thanks to their accessibility to various lenders.

• Don’t forget that with the competition out there to be your lender, you are essentially in the driver’s seat for negotiating a better rate.

• Although banks don’t have as much wiggle room for rate adjustments, brokers do, and they will often do the negotiating for you.

• Don’t forget to try to negotiate for your lender to pay for some of your fees, such as closing costs or legal fees, if you are bringing your business to them. It’s all a part of the negotiation game.

Shop around

In the not so distant past, we went to our banks for all our borrowing and mortgage needs. But times have changed, and there are many more options. Still, the facts don’t lie: over 50% of Canadians don’t shop around for their mortgage.

By all means, visit your local bank or banks, even if you don’t have your accounts with them. Find out what they have to offer you in terms of rates and any extras, like paying for fees or even paying for a moving truck! It’s all negotiable.

Come prepared. That means, bring your credit info, including your assets versus debts, your credit scores and any other outstanding loans that you may have. This knowledge will help your lender make a preliminary determination about your rates and the amount you can borrow before they start punching numbers.

How do banks set their five-year rates?

What is a fixed and a variable rate, how and why do these rates fluctuate, and how do the banks set these rates?

A variable rate will change as the index of which your loan is based changes – often this index is called a prime rate. The Prime Rate of your lender can change several times per year, possibly more and possibly less. It is correlated with inflation and the economy. Some lenders offer terms whereby your payment increases or decreases with the Prime Rate movement, while others hold the payment steady but the ratio/proportion of interest and principal will fluctuate.

Essentially, Canadian banks set their rates based on their borrowing cost, and the daily fluctuations of various stocks and bonds. If you choose a fixed rate, the bank is guaranteeing you that rate, usually for a term of 5 years, and they will deal with the daily fluctuations in the money market.

If you choose a variable rate, it can be riskier, but often results in a much lower rate. As mentioned before, variable rates are usually based on the prime rate. As the economy fluctuates, so does the prime rate and, in turn, your mortgage rate.

The difference between fixed and variable rates can be up to 3%. With such a large sum of money being borrowed, that can mean thousands of dollars in interest spent or saved.

• If you feel comfortable with a rate that can fluctuate over your term, then a variable rate is right for you.

• If you’re more of a safety-seeker and want your rate guaranteed, despite market fluctuations, then you’re better to go for a fixed rate.

The other biggest difference between a fixed rate term and a variable rate term is how the lender calculates the early payout penalty. It varies dramatically from lender to lender. Be sure to have your banker or broker thoroughly compare and contrast the difference for you.

5 things to know before renewing your mortgage

1. The posted rate isn’t always the best rate

   This falls under the category of “make sure you negotiate”. The posted rate should be a starting point for you, and you can go for a better rate from there. Educate yourself and shop around and see who is willing to go the extra mile for you and to save you the most money in the long run.

2. Shop around before you negotiate

   Don’t walk into a bank and try to negotiate a rate unarmed. You need to know what other institutions are offering, as well as the perks involved. You can find other rates online or by calling around. Lenders want you to borrow from them, and to make it worth your while, they will come down.

3. Bank or broker

   Brokers can usually offer a better rate than banks due to the variety of lenders that they can access. Nevertheless, your bank may offer other perks that offset the low rate that you get from a broker. Also, be wary of brokers that are brand new or have no tenacity in the industry. You want to ensure a trusting relationship.

4. Loyalty can hurt you

   Keep in mind that loyalty to your financial institution will not guarantee you the best rate when you’re up for renewal. So, once again, shop around and negotiate the best rate.

5. Check the terms before you sign

   As in any business transaction, always read the small print before you sign. Make sure the rate you choose offers other options that might be useful to you in the future, such as the ability to put in an extra payment or the option to skip a payment if times are tough. Review the stipulations around penalties if you need to get out of the mortgage.

Variable versus fixed-rate mortgages

Does it make you nervous when you hear the warnings about interest rates soon to be on the rise, or has the repetitive use of that warning dulled your reaction?

It seems like every few months we’re bombarded with warnings about “locking in” and dire predictions about interest rates. “Mortgage rates have been rising, and you’d better secure that 5-year fixed rate before your bank does the inevitable and raises mortgage rates.” Sound familar?

We’ve been hearing these predictions since 2009. However, these experts and prognosticators have largely been wrong on this matter. That may change in the future, but as of the publication of this post, banks are again announcing record low rates.

Why the big scare tactics on variable rates?

It should not come as a surprise that banks want to promote their 5-year fixed rates. Since mortgages account for about one-third of the Big Five banks’ retail profits, and fixed-rate mortgages are their most profitable, the motivation to encourage those products is reasonable.

It seems we Canadians are generally risk-averse, with around two-thirds of homeowners with mortgages opting for fixed rate mortgages.

Is it simply a case of wanting peace of mind? Or are we so maxed out with our mortgages that we don’t have any wiggle room in the event of an increase?

In 2008, Moshe Milevsky, Associate Professor of Finance at the Schulich School of Business at York University, and Brandon Walker, a research associate at the Individual Finance and Insurance Decisions Centre in Toronto, published a study that measured the direct and opportunity costs of going with either choice.

The amount of money that the homeowner can save by taking a chance on floating rates varied in the Milevsky and Walker study, depending on the time periods in question. But the average amount was impressive: $20,630 as of 2008.

Average variable vs 5-year mortgage rates

The typical difference between a variable rate and a 5-year fixed rate is 2 to 3 per cent. That is significant and, over a 5-year period, may be enough to offset the risk.

Mortgage broker versus the bank

Whether you’re a first-time home buyer, or you’ve owned a home before, the options for obtaining a mortgage today are extensive. Not only are there conventional methods through your neighborhood bank, but there are now many independent mortgage companies, such as mobile brokers, that will come right to your door.

The question remains: who to choose, and why?

How does a mortgage broker differ from a bank?

A mortgage broker is usually an individual who works freelance for themselves. They have many lending contacts, and can negotiate and offer very competitive interest rates.

They process your credit application in the same way that a bank would and can help you determine what is affordable for you, often in the comfort of your own home and on your schedule.

A bank-based lender, on the other hand, only works for their bank. They, too, will try to get you the best rate possible, but it is you that has to do the negotiating for that rate. Banks don’t have the access to quite as many contacts as a broker does.

Mortgage broker pros and cons

Pros:

• They offer extremely competitive rates, often more competitive than a bank.

• They will meet you anywhere, including after hours.

• They can often get you approved for a loan with poor credit.

• Since they are an independently operating business or freelancer, word-of-mouth referrals are extremely important. Therefore, they may offer to pay for your appraisal or legal fee in return for your business and referral—especially if you commit to returning to them once your mortgage term is up.

• They’re easy to get a hold of and to meet with, thanks to non-banker hours.

Cons:

• Some less well-established brokers may not have an office for you to meet, with options being having them in your home or meeting in a public (as opposed to private) location.

• Some brokerages use an online business model and do not meet with clients in person at all… That may or may not suit your expectations.

• Brokers specializing in private lending, for borrowers that have poor credit or too much debt, charge higher rates and fees and require massive down payments to qualify.

Bank mortgage pros and cons

Pros:

• Banks offer a high level of security (they are large corporations, so unlikely to go out of business) and are trusted and familiar for borrowers.

• They may offer a perk or freebie with the mortgage, such as a free bank account.

• Ease of services, such as ability to connect a mortgage to an existing account for payments.

• They offer lines of credit, such as a home line, which can be attached to your mortgage.

• Accessible, with 1-800 customer service numbers available at all times and branch availability.

Cons:

• You are responsible to do the shopping around and negotiating for the best interest rate, whereas a broker will do this for you.

• Bank interest rates are not as good as mortgage broker rates.

• Less likely to overlook poor credit scores, so you may not be approved.

For a visual overview of mortgage brokers and bank, check out the infographic below.

Purchasing a home is likely the most expensive purchase you will ever make, and you want to make sure that your lender is the right choice for you. The fact of the matter is that the evidence suggests that there are tremendous benefits to utilizing the services of a mortgage broker.

The data tells us that most Canadians are not shopping around for their mortgage, for a variety of reasons. If nothing else, a mortgage broker can do the heavy lifting so that we are able to make more informed financial decisions.

Want to learn more? Visit our Home Buying, Selling and Moving resource centre for everything you need to know about real estate, buying a home, or moving. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.