Finding the Best Mortgage

Benefits of shopping around for your mortgage:

Have you ever spent several hours shopping around for the best price on a sofa or television for your home? If so, this is a great trait to have when it comes to saving money. As long as you don’t mind investing the time, there’s money to be saved with many purchases you make in life. Not only is it useful for furniture, electronics and books, for example, it’s also a great idea for mortgages too.

As well as securing the best rates, shopping around can also prevent those pesky ‘hidden charges’ that only surface months or years later. For example, mortgage penalties may seem small but they can actually cost more than you think.

How do you shop the market for a mortgage? Luckily, for our free time (and perhaps our sanity), mortgage brokers will do all the work on our behalf. With access to various financial institutions and extensive knowledge of the available products, they’re an expert in the field and will know exactly how to help you. When looking for the very best deal, this is the best path to choose.

Of course, there will be some that go directly to their bank and there is nothing wrong with this…as long as you know the right questions to ask. To save a potentially costly error, here is some advice below.

Experience – How much experience does the bank representative have in the industry? How many people have they helped?

Future Plans – Do they plan on being in the same position in the future? Otherwise, are they aiming for promotion or do they even have plans to leave the industry? If possible, it’s always best to find a representative that plans to stay where they are because they’ll know your position and will be able to help with any issues you may have in the years ahead. We would never talk badly of representatives fighting for a promotion, but a common complaint from customers is that their representatives move around too frequently.

Different Mortgages – Be sure to discuss all the types of mortgages they offer to know more about the different terms and rates.

Collateral and conventional – If you don’t want to be stung by extra charges when changing lenders for a better rate at renewal, make sure you understand the difference between a conventional and collateral mortgage (how the bank registers the mortgage).

Prepayment Penalties – How are prepayment penalties calculated? Since you may have to get out of the mortgage before the maturity date, this could be important later in life.

Prepayment Privileges – Following on from the previous point, what are the prepayment privileges? We all want to pay down our mortgage as quickly as possible, right?

After your meeting with the bank, it’s time to contact a mortgage broker and you can ask them the exact same questions. All it takes is an hour with each and you will have assessed dozens of reliable mortgage lenders in the industry. With your own meeting with the bank, you can assess the one company and with the broker, they’ll take care of the dozens of others.

From this, there should be no reason you can’t secure the best rates and the best mortgage for your needs.

Banks and credit unions versus monoline lenders:

Everyone is familiar with banks and credit unions however many are not familiar with monoline lenders.

What are monoline lenders and why are they something to explore options with when looking for a mortgage?

Mono, meaning one, means that a monoline lender has one line of product to offer, that being mortgages. Banks and credit unions however offer a variety of financial services.

By offering one type of product, this of course does not mean that moonlike lenders are any less of a company or risky, it just means they specialize in one product. Just like Lamborghini is not any less of a vehicle compared to Honda or Toyota, they just specialize in one type of vehicle, and do it quite well.

If you do not like being solicited to, fortunately a monoline will not try to cross sell you on their other products like RSPs, credit cards, overdraft protection and so on, as they do not offer these.

Monolines in Canada are very reputable and have been around for decades. Many monoline lenders source their money from Canada’s major banks and lend it out at lower rates. With monoline lenders being able to focus solely on mortgages, they have been known to have more options on their mortgages and more streamlined online service. Plus they typically have lower rates due to having less overhead then banks and credit unions.

All monolines secure their mortgages with back-end mortgage insurance from one of Canada’s three mortgage insurers such as CMHC.

One major difference between a bank and a monoline lender is the penalty structure if ever needing to break your mortgage. With monoline lenders, the penalty to break the mortgage is much lower. This is because banks and monoline lenders calculate their IRD (Interest Rate Differential) differently. Banks use a posted rate which is quite high when calculating the IRD and monolines use what is called an unpublished rate or discounted rate. Typically, both banks and monoline lenders will allow you to port your mortgage.

Many banks will allow you the option to pay of 10% to 15% of your mortgage per year without a penalty, where monolines typically will allow 20%.

As mortgage brokers have access to banks, credit unions, monoline lenders and more they will be able to review all these different options for you.

I’ve never heard of that lender:

One of the major benefits of working with a mortgage professional is that they have access to many lenders, options and rates from traditional banks such as Scotiabank and TD Canada Trust to smaller lenders, trust companies, credit unions and so on.

For clients only familiar with traditional banks, many of the lenders available with a mortgage professional may be new to you. These lenders, although new to you are household, everyday names here.

A smaller lender does not mean you should fear them or that they are not a strong lender. Many of these lenders are quite large with with tens of billions of dollars in assets under administration, hundreds of employees and multiple offices across the country. Some even have branches in larger cities such as Toronto.

Lenders, are like hotels. There are major brands of hotels that you are most likely familiar such as Best Western and Marriott, however sometimes for the most catered experience a boutique hotel is the best option. For example, the The Magnolia Hotel & Spa in Victoria took the number one spot for Travel and Leisure’s best hotels in Canada for 2017 although perhaps many have not heard of this hotel company.

Big banks spend big dollars on branches, staffing and advertisement. Sadly however these big dollars come out of your pocket in the way of fees and higher interest rates. Big banks make big profits on this. I would rather see more of that money in your pocket than in theirs, in terms of interest rate savings for you.

For your everyday banking or your credit card, having a traditional bank may be the way to go with ATM machine access, unlimited withdrawals, travel points, and so on however as a mortgage is more for utility and serviced less frequently, such as every 5 years, having a luxury brand bank, may not be necessary and can be costly. Such as if you just need a simple tee shirt to mow the lawn you may be better off in Hanes then Hugo Boss.

Smaller lenders are governed by the same regulator as banks and follow the same guidelines.

When asked if they are risky, think that you have their money, they don’t have yours. Lenders are the ones taking the risk on you. For example, if you were to lend a stranger $100,000, would you or the stranger be taking the risk. If a smaller lender was ever to be bought or no longer offering mortgages, your mortgage contract, terms, rate, etc will still stay in effect until its maturity This could be seen when Scotiabank bought ING, now called Tangerine, for example.

Each person is unique and having a mortgage with a big bank or smaller lender is a personal preference and both can have pros and cons. I am here to go over all the pros and cons with you and help you make the best, educated decision for your needs.

How is your mortgage rate determined?

I get asked all the time when first talking to a client, “what are your rates?”

This question is perhaps similar to a person walking into Sherwin Williams and asking what are their colours.

This question may come up often as with a client’s bank there are only a few options choose from. Fortunately here, there are dozens of lenders to choose from through the broker channel, including major banks, with many products at each lender meaning hundreds of rate options.

Within these options however there are more factors that may go into determining your rate which some home buyers may not be aware of. From these following examples, you may quickly see how having mortgage professional assist in finding the right option for you is crucial to have the best solution and most competitive rate for your needs.

Here are a few examples:

1) Location. Not all lenders lend in all provinces, so depending on what province you are purchasing in, this may mean more lenders and rates or less lenders and rates to choose from. Typically provinces with more competitive real estate markets, will have more lenders and competitive rates.

2) How long the rate is held. Lenders typically will hold rates for 45 to 120 days. Generally the longer you need a rate held, the higher the rate. If your closing date is more then 120 days away, you will need to review rates closer to your projected future closing date.

3) Refinancing. Many lenders are starting to add a premium to their rates on a refinance. Also, with recent changes to mortgages, some lenders can no longer offer competitive refinance options which means less lenders to choose from overall. Buyers will typically have lower rates then those refinancing.

4) Home type. Some properties are considered higher risk then others and some lenders may not be able to assist with them or will have higher rates on these properties.

5) Second homes, vacation properties and income properties. These properties may have a premium added to a rate. Also, depending on the number of units in the rental property or if there is a commercial component, this can affect rates.

6) Credit score. Your credit score is a large factor in determining your rate. Those with excellent credit will typically see lower rates then those with a lower score.

7) Insured or uninsured. Those who have an insured mortgage (i.e. through CMHC when putting less then 20% down) may have access to lower rates then those with uninsured mortgages. Also, some lenders regardless of your down payment or mortgage structure, will offer different rates based on if your mortgage is potentially ‘insurable’ or ‘uninsurable’.

8) Fixed or variable. The type of mortgage you choose, whether fixed or variable, can have a big impact on your rate.

9) Property price. Homes prices at $1,000,000 or more may see higher rates then those under $1,000,000. Also, some lenders cannot assist with homes over $1,000,000, which means less lenders and rates to choose from.

10) Your loan to value. Lenders are now offering rates based on your loan to value. Those with 20% down may see a higher rate then those with 40% down, as an example.

11) Your amortization. 30 + year amortizations are still available however with these option their may be a premium on the rate or less lenders and rates to choose from.

12) Pre approval or a live purchase. Some lenders with a great rate will offer the rate on live deals only. Also some lenders are adding a premium to the pre approval rate you are offered.

As you can see there are many factors that go into determining your rate and working with a mortgage profession will be your best option to assure you have more options to choose from, a great rate and a catered solution for your needs.

Top five questions to ask your mortgage broker:

To ensure you get the best rates and options for your needs, here are some crucial questions you should ask your mortgage broker.

Is the mortgage a collateral or conventional charge? This is important to know especially for those who would like flexibility in the future and the ability to easily shop around other banks and lenders at renewal for a more competitive rate. A collateral mortgage is a non transferrable mortgage which means moving lenders at renewal for a better rate can come with large costs and extra steps. Some banks only offer clients collateral mortgages.

What is the lowest rate? With dozens of banks and lenders to choose from you can shop rates at many different types of lenders however like many purchases you’ll make, you can get what you pay for. Some low rate lenders have heavy restrictions and increased penalties on their mortgage products, such as a penalty of 3% of your mortgage balance. A mortgage broker can walk you through the pros and cons of different lenders to assure you get the best options for your needs and the best rates on a mortgage with your desired options.

Can I port and increase my mortgage? If you feel you may move to a bigger home within the term of your mortgage, such as a 5 year fixed term, then having the option to port and increase the mortgage is important. Some lenders mortgages are non-portable, others are portable but cannot be increased.

What pre-payment options come with my mortgage? Some lenders have restrictions on pre payment privileges and others just offer less options in general. Some major banks offer clients the ability to pay off an extra ten percent of their mortgage a year and others offer 20% or more as an example.

What are the penalties to pay out my mortgage? The industry standard penalties to pay out a fixed rate mortgage are the greater of 3 months interest or the interest rate differential. Unfortunately, many lenders including major banks, will use Bank of Canada’s posted rate when determining your penalty and not discounted rates. This can make a very large difference in the size of the penalty. If looking for more flexibility, ask about mortgage options with more client-focused penalty calculations.