Mortgage renewals can be a nerve-wracking experience, especially for first-time homeowners — and this year, there will be a lot of Canadians getting ready to go through that process.
Almost half of existing mortgages are up for renewal this year, according to a CIBC report from earlier this year. But despite homeowners having the opportunity to look for a better deal than their existing rate, or for a more appropriate product to fit their current stage in life or future goals, Canadians are unlikely to go rate shopping.
A HSBC survey of 10,000 people across ten countries showed that Canadians are the least likely to look for a better mortgage rate, with only 50 per cent saying they’ve done so, in comparison to the global average of 61 per cent.
It’s a stat that baffles mortgage brokers and financial planners.
Kelly Wilson, an Ottawa mortgage broker, says she believes every homeowner should consider rate-shopping at renewal time. Because the banks’ offer is based on posted interest rates, “the best mortgage rate isn’t being offered up front,” she says.
For those coming up on their renewal period and looking to get a better rate, Ms. Wilson recommends starting as early as six months in advance. Most financial institutions won’t let borrowers out of their existing rate until the renewal date, but “it's good to start locking in at a much earlier stage because if you start to see the trends going up, it may be worth paying a small penalty to re-lock in early,” she says. If they don’t appear to be changing, she says, it’s better to wait until the closing date to lock in.
She also says factors like how long someone has been in their property, how much equity they’ve developed, and if they’ve previously paid CMHC on their homes contribute to being able to get better rates.
Robert McLister, founder of RateSpy.com and a mortgage planner at Toronto-based intelliMortgage, agrees. He says that because of new rules like the federal government’s “stress test,” some lenders are offering even less competitive rates. “If your bank’s analysis of you as a borrower leads it to believe that you can’t easily switch lenders...it may quote you materially higher renewal rates,” he says.
Borrowers who look at multiple lenders can save ten basis points or more, Mr. McLister says — and for those offered less competitive rates, the savings from switching lenders could be even higher.
People who are shopping around often make the assumption that sticking with the one of the big banks is better, Mr. McLister says, but “there’s little risk of loss when dealing with a smaller lender.” And, he added, doing that might allow borrowers to avoid “onerous” bank penalties.
Borrowers also need to watch out for potential penalties on increasing their mortgage if there is a chance they’ll need more money before renewal; or a portability charge if they think they might move before their next renewal.
“Make sure the lender you pick allows at least 30-60 days, but preferably more than 60, to port your mortgage without penalty if there’s a chance you’ll move before maturity,” Mr. McLister says.
A mortgage renewal may also be the time to start considering moving from a fixed to a variable rate, or even move mortgage products altogether. It can seem like a scary decision, but it’s one that may benefit borrowers in the long run.
Ms. Wilson says there are three strategies homeowners can use with a variable rate: taking the lower payment right now to manage a change in their lifestyle; acting as if they’re paying the higher rate in the spread, and putting all the extra money they’re spending directly to their principal cost to pay down the mortgage before rates actually go higher; or investing the potential savings from a lower rate into a tax-free savings account or an RRSP, to earn a better rate of return.
As for moving products, borrowers should think about what their short- and long-term goals are, and whether their mortgage product matches them, says Scott Kwasnecha, a Leduc, Alberta-based financial planner with Financial Services Group, which is affiliated with Manulife Canada.
“Buying a house and having a mortgage for 20 or 30 years is one of the biggest financial decisions people make, so they should take some time to look around,” he says.
For people with specific goals related to their house, like paying off a first home to upgrade to another property, or investing in a vacation home, Manulife One could be a good fit.
Manulife One is a tailored debt management solution that combines investments, mortgages, credit cards and lines of credit into one account, with any income coming into the account directly going towards total debt. Because Manulife One calculates interest daily, homeowners stand to save thousands in interest payments, and customers are still able to withdraw from the account as needed for expenses.
“It’s a different style of mortgage that can be very fitting for clients who are looking for something that’s not the standard five-year rate. It can be a very powerful tool if used properly,” Mr. Kwasnecha says.
“It’s good if you’re good with money, a disciplined person and don’t want to pay a lot of interest over your lifetime.”
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