In Canada, 2015 was one of the busiest years for home sales on record. The typical mortgage term is five years, which means that when 2020 rolls around, droves of Canadian homeowners will be faced with a choice: Stay with their current mortgage lender or ditch them for a new one.
In 2017, CMHC released the Mortgage Consumer Survey, which revealed a whopping 79 percent of Canadians opted to stay with their current lender when the term expired. But this decision often comes at a cost: You might not be getting the most competitive rates out there. At least three months before your term is up, ask yourself these five questions:
Are you getting the best interest rate possible?
When a mortgage term is coming to an end, lenders send letters to their clients asking them to renew. They offer you an interest rate and all you have to do is sign on the dotted line — no documentation required. “If you switch to a new lender, 90 percent of the time or more, you’re going to get a lower rate, but they’re going to need all of your documents — your tax returns, proof of income, ID, credit score and so on,” says Toronto mortgage broker Elan Weintraub.
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Weintraub says some banks and lenders take advantage of the easy roll-over by withholding the best rates. “If you’re a bank or a lender, why would you give someone your best rate when you know inertia is on your side?”
“People drive across the city to save a penny a meter on gas but they won’t spend an hour putting together some mortgage documents that could save them thousands of dollars over five years,” says Weintraub.
Should you switch from a bank to a mortgage agent or broker?
“We recommend that even if they have no intention of leaving their bank, they at least call a broker. Just to make sure that their institution is offering them a fair rate in the current market,” says GTA-based mortgage agent Dion Beg.
Weintraub shares the analogy of a car dealership. If you go into BMW, the sales agent might sell you on the best possible car BMW has to offer. But a mortgage agent or broker has access to every type of car on the market. “I can sell you a BMW, Audi, Honda, Tesla, Mercedes and I’m going to tell you the advantages and disadvantages of each. BMW is only going to tell you about BMW. They’re not going to tell you that Audi is on sale, or Tesla uses electric and doesn’t need gas.”
Are you happy with your lender and the terms and conditions of your mortgage?
Beyond getting the best interest rate, are you happy with the service you’ve been provided by your lender? Are they knowledgeable, prompt and thorough? Are you satisfied with the terms and conditions of your mortgage, like prepayment privileges? If you need to break your mortgage early, does your lender have incredibly harsh penalties? It’s important to do your research and shop around to ensure you have a mortgage product that suits your needs and lifestyle.
Would you pass the mortgage stress test with a new lender?
In January 2018, new mortgage rules were introduced that require all Canadian homebuyers to take a stress test in order to qualify for a mortgage from a federally regulated lender — this usually means one of Canada’s five major banks.
If you’re contributing at least 20 percent to your downpayment (meaning you’re an uninsured homebuyer) — you will have to meet either the Bank of Canada’s five-year benchmark rate (currently sitting at 5.34 percent) or the rate offered by your lender plus two percentage points. Whichever percentage is higher will be the rate you have to test your finances against.
Planning to put down less than 20 percent? You will default to an insured mortgage and will also be measured against either the Bank of Canada’s rate or the rate offered by your lender (without adding two extra points). The higher number wins, once again. This reduced purchasing power and edged some homebuyers out of the market entirely.
One loophole is that you don’t have to qualify for the stress test if you stay with your current lender. “Because of the stress test, some clients are being held captive as customers with their current lending institution,” says Beg.
“Maybe my income isn’t as strong as it was five years ago. Maybe I’ve run into some credit issues. All of a sudden, with the stress test, I won’t qualify for that lower-rate mortgage,” says Weintraub.
The existing lender can leverage this by withholding the best rates, knowing their clients won’t be accepted by other federally regulated lenders, or that they’ll be forced to go to alternative lenders with extremely high interest rates.
“I’ve had clients call me and tell me they’ve run into some credit trouble or they’ve been laid off and their mortgage is up for renewal. I tell them to sign the renewal papers,” says Weintraub.
Then again, after five years, many homeowners are in a better position to pass the stress test as their income has likely increased and they are further established in their careers. In addition, they’ve paid down the home over the five years and the value has hopefully increased significantly.
Do you want to take any equity out on your home?
If you simply want to pick up your current mortgage and drop it on a new lender, you are doing a switch. “There might be some legal fees, appraisal fees and discharge fees, but generally, the new lender will cover those costs on a switch,” says Weintraub. For example, let’s say you got a 25 year amortization and five years pass. When you switch to a new lender after the term is up, you will pick up where you left off, with the remaining 20-year amortization to go.
With a refinance, you’re getting a brand new mortgage and will be taking equity out on your home. “Let’s say I bought a property four years ago for $500,000 and I put ten percent down. And now that $500,000 property is worth one million dollars. Now, I can refinance up to $800,000 as long as I have the income to qualify for it.” In other words, you can refinance up to 80 percent of the value of the home but you need to prove you can take on the new level of debt. If you qualify, you receive a cash payment and pay it back with your mortgage. Often people will refinance their mortgage to pay down debt, invest in renovations or purchase an investment property.
“One of the strategies we’ve been using for the past 15 years is to show clients how to buy that second property, and then in the future, sell it and take the proceeds to pay off their first house,” says Beg.
You can refinance your mortgage halfway through the term, but be prepared for costly penalties. These penalties will depend on the terms and conditions of your mortgage and whether it’s variable or fixed. For this reason, it’s best to look into refinancing your mortgage upon renewal with your existing lender or another lender of your choosing. Generally, with a variable rate mortgage, the penalty is just three months interest. With fixed-rate mortgages, the penalty is three months interest or the interest rate differential (whichever is greater). It can get aggressive. “Sometimes, the penalty can be a couple thousand dollars, which arguably is reasonable because you’re breaking a contract,” says Weintraub. “But sometimes the penalty can be $20,000 to $50,000.”