What is your best mortgage rate?
This is the question that most Canadians begin and end their search with, when they look for a mortgage.
Banks Love this.
Every 3 months, Banks report earnings, and they all virtually top $2billion dollars. Every. 3. Months.
And Yes, Banks love it when you narrow in on one question, namely, what is your best mortgage rate?
Do you watch sports? Have you seen the movie, “Moneyball”?
How about all this craze about the whole advanced stats, and analytics?
…..bear with me a moment…..
If you have a fantasy sports team then you probably can relate very well to where I am trying to go with this.
There are stats for everything….how this quarterback plays in the rain after his birthday on the 3rd sunday of the month…
How that hockey goalie performs extremely well after a loss….
Statistics and numbers and probabilities are everywhere…..even in the banking world.
The banks spend millions and millions of dollars on doing research, to find out behaviours about you that even you do not understand.
With this research, your bank is able to predict your future behaviour- and pretty successfully actually.
Afterall they are making TWO BILLION dollars every THREE MONTHS.
This post is about sharing some of these stats with you, and helping you with some ways to get the banks working in your favour.
Here are some of the stats that the banks look at
- roughly 75% of Canadians take a 5 year fixed mortgage (why? – when I ask my customers this question, a lot of them are not even aware that there are other options)
- roughly 2/3 Canadians will break their mortgage contract before 5 years. In fact the average person will break their mortgage at about the 36 month mark (yes- there is a stat for that too).
- virtually all mortgages in Canada at present, are closed mortgages, which means that if you break the mortgage term, there is a penalty clause that kicks in. Meaning, you are charged a penalty to break your term (an open mortgage is a mortgage that will have no penalty if you break your term early)
- by law, if you have a variable rate (or adjustable rate) mortgage, the penalty is calculated the same across all lenders. 3 months interest. Which roughly calculates to about 500-700 dollars per every $100,000 that you owe on your mortgage.
The penalty that is triggered when breaking a mortgage – especially a 5 year fixed mortgage- is very important to consider.
The verbiage that you will see on virtually every single mortgage contract, with every single lender when it comes to penalties for fixed rate mortgages are as follows
“the greater of 3 months interest, or our interest rate differential calculation (IRD)”.
We won’t go into the details of how the IRD penalty is calculated in this post. If you would like to learn more, please feel free to contact me (I will also post a link here to an older blog that I had taken down explaining the penalty calculations in more detail)
Roughly speaking though, the IRD calculation translates to – with most of the big bank and credit union lenders- to roughly about $5,000 per every $100,000 owed.
With other lenders, the calculation ends up being between $1,000-1,500 for every $100,000 owed.
That is roughly a 5 times difference!
A penalty with one lender can end up costing you up to 5 times more than with another. But what about interest rates. What if that lender is giving me a better rate?
How much do interest rates really matter?
Do you know what the difference between a rate of 0.25% is on your monthly payment? If one lender is giving you 0.25 percent more (a quarter percent more) than another lender.
So, if lender A. is giving you 3.50% and lender B is giving you 3.75% do you know how this is going to impact your payment?
Well, roughly speaking, for every 0.25% change in interest rate, your monthly payment is impacted by about $13.10 for every $100,000 that you owe (one hundred thousand dollars). So, if you owe or are planning to borrow $300,000, your payment is going to differ by about $39.30.
Now most of the time, you are not going to see that big of a difference in rate from one bank to another. Usually you see a difference of 0.05 or 0.1%.
Even in our scenario above, a difference of $39.30 – over 5 years, is going to cost you $2,358. That is for a $300,000 mortgage.
What if you break that mortgage and your penalty is $5,000 per every $100,000 that you owe? 5×3=$15,000.
What do you think that you need to be more aware of? Saving 0.1% on your interest rate? Or making sure you know how your penalties are calculated, and going with a lender that has a more reasonable calculation?
What Questions you really should be asking – and how to properly shop for a mortgage.
Here are some questions that you really should be asking in addition to “what is your best mortgage rate”.
How much will it cost to break my mortgage?
remember, there is a 67% chance that you might break your mortgage, especially if you are taking a term that is longer than 3 years.
If I lose my job, can I get the mortgage to pay for itself?
things happen in life, and it is always a good idea to do as much as you can to be prepared. There are options that you can add to your mortgage, such as a line of credit component, that you can use as relief in a situation like temporary loss of employment.
Can I pay off my mortgage in less than 15 years, even though I sign up for a 25 year or 30 year amortization?
The simple answer to this is yes, if you really want to. But it may not make sense for you to do so. The only way to find out for sure is the ask the question!
Can I get a mortgage without paying CMHC insurance fees?
Again yes, you can, but you may not want to as it may not make much sense for you to do so. Asking is the first step to finding out.
Can I put less money down? Is there a difference putting down 5% vs 20%?
Same drill, even if you are buying your third property, but this is the first place that you are going to be living in. The other 2 are rented out. You CAN put 5% down (you do not have to be a first time home buyer to be able to put 5% down). Does it make sense for you? Well, you need to ask the question to find out!
Can I pay interest Only?
There may be a way to structure your mortgage so that you can pay interest only payments. And again, depending on your situation, this might make a lot of sense for you. The only way to know for sure, is to ask!
I am getting a divorce, what can I do?
Things happen in life, and a reality is that people get married, and people get divorced or separated. It is not something that you really want to think about when you are buying a home together, but the sign of a good advisor is to have this in mind, and to plan for contingencies.
Can I find a mortgage broker that will conduct an annual review with me every year?
A lot can happen in one year. If you are single, you may want to get married. If you are married, you may have a child. If you have a child, you may have another. You may get divorced, you may get promoted, you may change your job. The list goes on.
The fact is the mortgage that was right for you in 2018, may not be right for you in 2019, or 2020, or 2021. It is important that you check in at least once a year to find out for sure. This is afterall probably the largest amount of money that you are going to owe in your life time. 15 minutes a year to see if your mortgage is optimized should be something that you should demand from you mortgage provider.
I hope this helps, if you have any questions please do not hesitate to reach out.