1 Consider all your needs:
There’s more to a mortgage than the interest rate
We all do the same thing; we all focus on the things we know best. For most people, when it comes to their mortgage, it is the interest rate. Of course the interest rate is important, but there are dozens, even hundreds, of other factors that could save you thousands of dollars. For example, did your bank representative speak to you about combination mortgages? Did they offer you the option of putting slices of your mortgage into open products? Or, you just received an inheritance or have just sold a valuable good and want to use those funds to pay down your mortgage. Be sure to avoid abusive penalties while trying to put that money towards your current mortgage. TALK STRATEGY when speaking with your mortgage broker .
Another example is a couple that just purchased a new home. They signed for the new home before they completed the sale of their current property. They therefore do not have the $100,000 of equity from their sale to put towards their new home. An open mortgage would allow them to inject that money into their new mortgage at any time, without penalty. This would save the couple thousands of dollars in interest.
2 Think about your mortgage needs for today and tomorrow
Approximately 80% of people sign for a 5 year fixed mortgage. For many people it is the perfect product, but for others taking a 5 year product is a very costly mistake. For example, if you plan on expanding your family in the next 2-3 years, your condo or small house may not be sufficient. If you took a 2 or 3 year mortgage you would avoid approximately $3000 in penalties for cancelling a $200,000 mortgage…and would probably have paid a lower interest rate for your short-term mortgage.
3 Pay Attention to Mortgage Loan Penalties!
A mortgage loan has certain risks, which need to be evaluated carefully, especially those regarding penalties.
Choosing a mortgage lender is not easy because there are approximately twenty financial institutions all offering ten or more mortgage products. It is widely recognized that consumers can find themselves faced with almost 300 mortgage products! Clearly it is a challenge to discover the best one.
The mortgage broker will analyze your needs to help you save on interest costs, but also, and most importantly, will build the best mortgage for you and can even make sure, you avoid any pitfalls such as important penalties if your situation changes as in the case of a move, a separation, a need to refinance, a renovation project, etc.
How does this really work?
As a general rule, financial institutions allow for an annual mortgage prepayment between 5 and 10% of the initial loan amount without penalty. However, should you wish to repay the entire loan before term, you will pay a penalty. In the case of variable rate mortgage loans, the penalty is usually three months interest. With fixed rate loans, the lender will demand the greater of these two amounts:
1) Three months interest;
2) The amount of revenue lost between the interest rate at the start of the loan and the amount that would be obtained at the moment of repayment.
The first case scenario is easy to understand: the lending institution usually bills you for three months interest. Your mortgage broker can help you calculate this penalty ahead of time by analyzing your monthly amortization or depreciation table.
With the second case scenario, the penalty is based on the rate differential. Most financial institutions calculate their loss of revenue based on the current interest rate, then factor in the difference between the discount you were offered on the current rate and the interest rate of your mortgage loan. For example, let’s say on October 6, 2015, it was possible to negotiate a fixed rate mortgage with a 2.54% interest rate, a discount of 2.25% off the current rate of 4.79%.
If you cancel your mortgage before term, you will be billed for the differential rate amount on the remaining term of your mortgage loan. For certain clients, this penalty can amount to more than $10,000. Such a situation arrives more often than you would think, either because of a move, a separation, a need to refinance, or a need to undertake major repairs.
Negotiating the mortgage rate is not the most important component of the mortgage loan process; rather, it is negotiating the penalty terms. You must negotiate your penalty terms; if your financial institution refuses to do so, consult a mortgage broker. Fortunately, some financial institutions calculate the penalty on their promotional interest rate instead of the current rate, which can, in certain cases, save you up to 75% of your penalty costs.
If you make such a poor choice only once in your life, such a penalty can wipe out all the savings for which you so dearly negotiated your mortgage renewals over twenty-five years.
It is important to consult a mortgage broker to negotiate your mortgage and thus avoid getting trapped by financial institutions’ promotions.
Another trap to avoid
Sometimes, a bank will try to break into the market with a loss leader interest rate, one ostensibly better than competitors’ rates. However, a word of warning: for a few dollars in monthly savings, such a mortgage can be very restrictive, particularly in the area of abusive penalties. For example, a Canadian institution limits annual prepayment to 10% and does not allow for complete repayment before term. The property can only be sold for its just market value and only to a buyer not related to the owner.
In such a situation, it is impossible to either renovate or to consolidate debts without paying the total bank penalty. There is no way for the consumer to avoid this and consumer would have to pay the banks thousands of dollars in order to undertake a desired project.
Rest assured, your mortgage broker will allow you to avoid these traps!
4 Don’t compromise the transaction: Be prepared, do your homework
With the tightening of the Canadian mortgage rules in recent years, the conditions for obtaining a mortgage are stricter than ever. Start preparing your documents as early as possible, because if you are missing something you may have to order it from the government (Ex: Federal Notice of Assessment) and the ensuing delay could compromise the transaction. If you work for a large company, contact the Human Resources Department immediately so you will be able to provide the banks with the proof of employment they will need as quickly as possible.
Be organized and proactive. The success of the transaction greatly depends on your ability to provide the banks with the necessary documentation in a timely fashion.
5 Consider the offers from several financial institutions
How can you be sure that your bank or Caisse is providing you with the best rates and conditions?
There are only 2 ways to be completely sures:
• Wasting hours and days doing the tour of all the banks, only to end up inundated with information that could leave you confused.
• Use the services of a mortgage broker who specializes in finding you the best rates and conditions from the various lenders. And all of this is free of charge..
Remember, you as a single client negotiating a $300,000 mortgage, do not have the same negotiating power as a mortgage broker that negotiates millions of dollars of mortgages with the head offices of several banks and financial institutions every year.
Also, if you are negotiating for yourself, remember to specify several details with your bank: payment options, penalties if you break the mortgage before term, can you make your payments from several bank accounts etc.
And finally, look for any conditions surrounding your interest rate. Are there any hidden fees? Do you need to take the bank’s life insurance in order to benefit from their best rate?
6 Put all of the mortgage broker’s skills to work for you
Brokering a mortgage for our clients requires an extremely varied skill set. Often, your broker is the central pillar between the client, real estate agents, notaries, banks and sometimes even building inspectors. Your mortgage broker is <hyper specialized> in all areas of mortgage financing and will accompany you through each important stage of the mortgage process in order to help you achieve your dream! Trust that your broker’s services will go far beyond getting you a good rate.
7 Thinking that there are cost for working with a mortgage broker
People often wonder how mortgage brokers are able to get better rates and conditions for their clients while not charging for their services. Remember, the banks and Caisse do not have to pay the broker until the broker has presented and completed a file with them. The banks, therefore, gladly pay the broker a commission especially since they do not have to spend large amounts of money on extra marketing, salaries and branch related costs in order to acquire these new clients.
Therefore our services are completely free for you!!!
8 Listening to well-intentioned amateur:
Finally, did your uncle that received “a great deal” on their mortgage mention that it was only for a 1 year term or for a variable rate? Often, people do not fully understand all of the conditions and limitations behind their “Great Deal”. Remember, the length of the mortgage, payment options and flexibility of the mortgage can often influence the “great deal” your uncle received on his mortgage. We recommend that you consult a mortgage specialist, and not simply rely on a friend or family member, no matter how well intentioned they are.