Other than getting the best rate possible, what do you need to know about negotiating a mortgage? Are you aware of break fees? Pre-payment privileges? Do you know what penalties, if any, the bank will charge you? Have you come up with a budget, independent of the bank's?
Doug Melville, Canada's banking ombudsman, joined us on Wednesday to answer your questions in a live online discussion about how to set up your first mortgage.
Mr. Melville also appears in this video posted on the globe investor personal finance site Wednesday as part of Building Blocks, a special web series geared towards educating young Canadian families about various personal finance topics. In the video, Mr. Melville talks with Globe personal finance reporter Roma Luciw about the process, pluses and perils of negotiating your first mortgage. Building Blocks is running online every Wednesday for four months. For last week's story and tips video, click here.
Mr. Melville was appointed the ombudsman for banking services and investments (OBSI) in August of this year. He joined OBSI, an independent organization, in 2006 as senior deputy ombudsman for banking services. Before that, he held positions in the financial industry and worked as a management consultant and policy analyst in Canada, Africa and the Middle East in the fields of international development, political and economic analysis and project management and evaluation. He has a law degree and an MBA from the University of Western Ontario, and a Master of Laws from Osgoode Hall Law School at York University.
Mr. Melville joined us Wednesday at noon ET for a live online discussion. Your questions and his answers will appear in the space below.
Editor's Note: globeandmail.com editors will read and allow or reject each question/comment. Comments/questions may be edited for length or clarity. HTML is not allowed. We will not publish questions/comments that include personal attacks on participants in these discussions, that make false or unsubstantiated allegations, that purport to quote people or reports where the purported quote or fact cannot be easily verified, or questions/comments that include vulgar language or libellous statements. Preference will be given to readers who submit questions/comments using their full name and home town, rather than a pseudonym.
Roma Luciw, Globeinvestor.com: Hi. My name is Roma Luciw and I am a personal finance reporter and web editor at the Globe. Some people have already sent us some questions through email and we will get to those right away.
Andrew asks: A couple years ago I was one of those people that got a 40-year mortgage and since then I somewhat regret that. The mortgage is currently a five-year fixed rate term. I was wondering if it is possible when renewing my mortgage to shorten the amortization period by five to 10 years? I realize the monthly payments would be more and that isn't an issue. I am just not sure if I am stick with the 40-year amortization period or if that can be adjusted at renewal.
Doug Melville, Banking Ombudsman: Andrew, At the end of your current term, you can very likely make all sorts of changes to suit your needs. I hear you about wanting to shorten the amortization period so you can to maximize your pay-down of the mortgage over time. I suggest you speak to your mortgage lender about the options available to you upon maturity of your current five-year mortgage. You might also ask them what options there are to make occasional pre-payments under your current mortgage...that could also see you mortgage-free faster.
Ashley asks: If I select a five-year closed variable mortgage (and get a better interest rate now), but interest rates go up in two-three years, will my payment be the same or will it increase with the interest rate?
Doug Melville, Banking Ombudsman: Ashley, The variable rate on your mortgage means that the interest you owe the lender changes with the market rates over time. In most such mortgages - check your mortgage document and ask your lender to be sure - your total payment stays the same but the proportion of your mortgage payment that goes toward paying down your mortgage can vary. If interest rates go up, your interest portion of your payment goes up and the proportion that pays down your mortgage drops. This would mean your mortgage will take longer to pay-off. When your current mortgage matures, the total payment amount can be reset to suit your needs given the interest rate environment. As I mentioned in the previous question, check if you have the ability to make occasional prepayments on your mortgage so that you can off-set any interest rate increases and pay down your mortgage at the pace you want.
Jacqueline from Whitby, Ontario asks: When I got my first mortgage, my bank pitched me this great option - a home equity line of credit (HELOC). A fixed rate for the mortgage and then prime on the revolving portion. Because it was at prime, I used the revolving portion to consolidate my loans, do some home renovations, etc. My bank recently advised me that the revolving portion of the HELOC is no longer at prime, but prime plus one. I feel a bit cheated. They advised me there was a $3,000 fee for breaking the HELOC agreement.
I know there is always fine print in a contract. But the prime rate was the agreement. It was on this basis that they sold it to me. I really had wanted a long term fixed rate. I didn't know what a HELOC was before they explained to me what a great deal it was to borrow at prime. I tried to reason with them; all they kept saying was that they "understood" how I felt. My alternative, and the one I am considering, is paying the fee and moving the mortgage. Is there anything I can do?
Doug Melville, Banking Ombudsman: Jacqueline, I understand your frustration. I strongly suspect that the documentation you signed for the HELOC permitted your bank to adjust the rate on that portion of your loan (not on the fixed mortgage). Please check that to make sure. My suggestion is for you to raise the issue with your bank again. Also know that you can escalate a complaint to more senior levels at your bank, including to your bank's internal Ombudsman. Your bank may be willing to discuss other options with you. It never hurts to ask.
Failing that, you have the option of paying the "break-fee" and paying out or refinancing the amount you drew down on your HELOC. Make sure you get clear information on the pay-down amount from your bank as the amount can vary over time as market interest rates change. You can also wait until the maturity of your current mortgage loan to change your current arrangement.
Matt Kingston asks: At what point does it become a really good idea to lock in to a fixed mortgage from a variable, adding a couple of years to your term? I'm saving big on interest now (prime - 0.6) but I'd like to lock into low interest fixed rate for a longer term so that I can escape (some) of the wrath of higher interest rates that seem to be on the horizon a couple of years from now.
Doug Melville, Banking Ombudsman: Matt, A tough one. I wish I could accurately predict interest rates. I would have played the market and be retired by now at a sunny island somewhere with great scuba diving.
The choice between fixed and floating is a personal one based on your personal comfort level and expectations of the market. Lenders offer both fixed and floating to cater to customer preferences and needs. There are even some products which allow you to float and then lock-in later if you wish.
You might wish to do some on-line searching as I have had several bankers tell me that there has been research done indicating that people who are comfortable going with floating rates do better over the long-term but they do run the risk of having their rates rise with the markets. I remember well the mortgage rates of the early 1980's which were in the 20% range for a short while. Sorry I can not be of more assistance on this one...a personal call for you to make. I suggest you discuss your preferences and needs with your lender.
Anthony wants to know: Mr. Melville, My fiancée and I are planning to move to Calgary next year where she will finish her medical residency in family medicine. By next year we will have a combined student dept of $100,000. Should we even consider getting a mortgage if our move to Calgary is for two-three years? I'm just finishing teachers college and assuming that we'll both be working, our combined total income (before taxes) will be around $90,000 for those first two years. However with the recent drop in home prices across the country, it would be a great time to buy instead of paying rent every month. What do you think?
Doug Melville, Banking Ombudsman: Anthony, Buying a house to live in is a big long-term commitment and usually the single biggest financial decision a couple can make. Buying and selling homes involves costs that many first-time home buyers don't appreciate. If you are buying to live versus buying for an investment, that may affect your choices. You will want to discuss what your objectives are. Early in your professional lives and in debt, you are at a relatively vulnerable stage and therefore need to plan carefully.
My suggestion is you two take this opportunity to create a comprehensive financial plan which takes into account your debts, assets, projected income, expenses, investment/retirement plans and the changes your busy lives will go through over the foreseeable future. What kind of financial capacity you have, coupled with the flexibility you may need to move or accommodate unexpected expenses, may limit your options. Seek out financial advice, perhaps consult a financial planner. Ask lots of questions and consider the possibilities. Then you will be in a much stronger position to make the exciting decisions that lie before you. Good luck with your plans.
Sara asks: A multi-part question regarding approaching a mortgage broker regarding a mortgage pre-approval: What is the best way to select a broker? Can/should someone request pre-approval from more than one broker/bank? Does requesting a mortgage pre-approval tie you to a certain broker or bank, or can you search for the bank/broker that offers the best rate once you are ready to purchase? Thank you.
Doug Melville, Banking Ombudsman: Sara, In terms of both mortgage brokers and lenders, I think it is always a good idea to shop around and seek advice from those you trust. Getting pre-approved by one or more lenders lets you know what you can confidently purchase and not have to worry about lining up financing after you have committed yourself to a home purchase. Just make sure that you are not committing yourself to the lender and that no fees or other costs are being incurred by you in getting the "pre-approval".
Carolyn wants to know: I am a single parent about to make my first home purchase (I have never had a mortgage before). What is the most important thing I should consider when shopping around for a mortgage?
Doug Melville, Banking Ombudsman: Carolyn, I wish it were a simple answer for you. It isn't. The biggest issue to consider is your broader financial situation so that you are comfortable getting yourself into a mortgage in the first place. I suggest you seek financial advice on this first.
Assuming you have that covered off, you need to know that a mortgage is a complex agreement. You need to be very sure what you are getting into and there are many aspects of a mortgage that can be important depending upon your personal circumstances. Read and understand what you are signing. If you don't understand it, get someone to help you do so.
While many people focus on the mortgage rate, you also need to be aware of the term, amortization, flexibility to make changes to your payments, ability to make occasional extra payments to pay-down your mortgage faster, penalties for paying-out the mortgage if you need to move or sell your home before your mortgage matures. Getting the proper advice to help you match up your personal needs and preferences to a mortgage product will help ensure you get the best fit for you. Also be aware of the extra costs that can arise with home ownership like property taxes, insurance, maintenance which can be a surprise to some first-time buyers.
This is a very big step, make sure you take it with your eyes wide open. Good luck.
Roma Luciw, Globeinvestor.com: Thanks for taking the time to join us Doug. Our apologies to the people who sent questions we did not have the time to answer.
Doug Melville, Banking Ombudsman: My pleasure.