Not everyone gets the same deals on mortgages.

You probably already knew this, but a brand new study from The Bank of Canada confirms it: those who shop around really do get better deals on mortgage rates.

The report, “ “Discounting in Mortgage Markets” looks at insured Canadian mortgages from the mid 1990s to 2004 and found an ever-increasing range in the discount rates customers received.

What made the difference? Brokers got top rates. Those who live outside cities got better deals. Banks also gave preferential rates based on loyalty, age and finances. Mostly, the report concluded that people who compared prices and asked questions were rewarded with savings.

There was a big gap in the mortgage rates different buyers received. The authors estimated that a buyer who got a mortgage at the higher end of the discount rate versus someone on the lower end would save more than $9,000 on the life of an average mortgage.

Interestingly, the study’s author’s found the bank’s posted rates were almost always the same. It was behind the scenes where bank managers were offering people who asked — or their brokers — better deals.

It didn’t use to be this way. Back in the early 1990s, there was little mortgage discounting. Then foreign companies and mortgage brokers came into the market, and back-room discounts became the norm.

Personally, this report makes me feel both better and worse about my own mortgage history. When I first bought a house more than ten years ago, I was so totally grateful to be loaned money by my bank, and knew so little about interest rates, I barely knew what I was paying.

Three years later, when my renewal notice came in the mail, I signed it and sent it back.

Then I realized, after being locked in for five years at a pretty crappy rate, that my passive approach was not paying off. And I realized that banks desperately wanted my business and my loan, and that I was in the position of power.

So ever since I’ve worked a lot harder at renewal time. I’ve compared rates online. I’ve compared one bank against another. I’ve used a mortgage broker. I’ve developed a relationship with someone at my bank and I’ve pushed her to give me the best rate she can — or I’ll start making phone calls.

If you have a troubled financial past and a poor credit rating, you may feel you don’t have the right to push for a great rate. When you work with a broker or move to another bank for a mortgage, you have to pony up a lot of financial records, and that can seem daunting, even embarrassing.

It’s no fun to dig up old tax returns and try to cram 50 pages of information through a fax machine. But it’s very much worth it.

Check out the report: it’s mostly understandable for a lay audience, and also explains some of the back story of Canadian mortgage rates. Or just keep in mind the paper’s basic message: making the effort to get the best rate possible from the lenders you talk to is very much worth it. All you have to do is ask.

Diane
Writer for RateSupermarket.ca

Perhaps you personally know people who currently have low mortgage rates and are enjoying lower monthly payments after reviewing their mortgages and taking advantage of the all-time low rates offered a few months ago. It’s natural to be envious of their situation, but does that mean you will reap the same benefits? With all of the hype surrounding it, jumping on the mortgage refinancing wagon seems very appealing indeed.

Early refinancing has become a bit of a trend; a trend that certainly isn’t surprising. Fear may very well be a big motivator, especially at a time of economic unrest. Everyone is looking to save money where they can. Obtaining a new loan with better interest rates for your home could mean saving money on monthly mortgage payments or using the extra money on other projects such as renovations or investing.

But, while getting in on the benefits, and in turn, gaining a better night’s sleep knowing your payments are lower for a chunk of time seems appealing, you may want to postpone making an appointment with your financial institution until you have determined if a new loan is right for your particular situation. After all, the decision to break an existing mortgage should not be taken lightly. You should know that, regardless of what the benefits look like on the surface, there are penalties associated with
mortgage refinancing; penalties that could leave less change in your pocket than you had expected.

Before you sign any papers, do your research and speak with your mortgage broker. If now isn’t the time to refinance, keep in mind that mortgage brokers can review your mortgage at any time so don’t think there is nothing you can do about your mortgage as it matures. For now, ask your broker to conduct a mortgage analysis to determine if renewing your loan at a lower rate is worth it.

What are the penalties?

Until recently, the main penalty you would ever have to pay was three months interest, but now that many people are locked into a fixed rate mortgage, institutions use a formula called Interest rate differential (IRD) for prepayment penalties. The calculation of your penalty using IRD involves the percentage difference between your current and new lower rate times the number of months left in your mortgage. In other words, this could be expensive.

According to Dan Eisner, senior mortgage specialist with True North Mortgage, “Refinancing to achieve a rate reduction is not for everyone; firstly, you must have at least 5% equity in your home. Secondly, the method a bank uses to calculate the IRD penalties vary and the resulting penalty may be too high to make the process worthwhile. Thirdly, you must re-qualify for the mortgage.”

Yes penalties can get costly, but that doesn’t mean it’s not worth looking into. In order to keep your business, financial institutions can take 15% off the balance of your mortgage to calculate the penalty, rather than using the full amount; thus, lowering your overall penalty fee. Or in some case, banks will offer a blended rate for the remainder of your mortgage period. Your penalty really does depend on your lender so it is wise to negotiate.

What is a blended rate?

A blended rate combines your present mortgage at its existing rate with any additional money you borrow at the current rates. Doing this allows you to take advantage of existing lower rates without having to pay a penalty.

Be warned however, that some financial institutions may be using posted rates, rather than the lower rates to calculate your new blended rate. So be sure to ask if the rates being used are the discounted rates. It is also wise to shop around and ask your mortgage broker if you are being offered the lowest mortgage rates available.

Whether you choose to refinance your mortgage, go with a blended rate to take advantage of some of the lower rates available or stick with your current rate, you should be looking long term rather than short term. As Eisner states, “We recommend taking a variable rate mortgage to take advantage of the recent prime rate reductions but we believe in the long run it will be wise to lock in your rate.”

No one can predict where interest rates will be five years from now. Therefore, it may be wise to lock in on the current low interest rates available – if you are nearing the end of your term. Otherwise, take time to do the math to determine if the penalty equals less than the money you are hoping to save. If you and your mortgage broker determine that long term savings outweigh the penalty, taking advantage of the current low interest rates may be something you shouldn’t pass up.

Caroline
PR@RateSupermarket.ca