Do Banks Give The Best Mortgages?

While you could get a great mortgage from going directly to your bank, that’s rarely the case. There are many factors that play into getting or renewing a mortgage. The obvious one is the interest rate we get. However, others include the penalty you might pay to break your mortgage or the amount of down payment. And that’s without getting into investment properties. The list could go on.

While all companies want to make money, banks are particularly good at it. As we see in the One Billion Dollar profits every quarter. Yes, that’s four Billion dollars in PROFIT in one year.

Now, I’m not going to go into a rant about how bad the banks are, however much of that profit comes from mortgage lending. So let’s break down what to consider when getting a mortgage.

Interest:

Like we all know, the amount of interest you pay on a mortgage adds up over time. If you take a mortgage at 5% with a 25 year amortization with no extra payments you will pay a further 75% in interest. If it’s a 30 year amortization you’ll pay about two times your loan amount!

To put that into perspective a $100,000 loan will incur $74,481 in interest over 25 years. Or $92,128 over 30 years.  Or to use more realistic numbers for the GTA, a $700,000 mortgage will incur a further $521,000 in Interest over 25 years. Or $645,000 over 30 years.

Visit https://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MortgageCalculator.aspx to play with your mortgage amounts.

So it goes without saying that shopping around for your mortgage can save you a ton of money. Even if it’s a bit inconvenient. A reputable mortgage broker can take all the leg work off your plate and still get you excellent rates. Contact us for some recommendations.

But sometimes the banks give the best rate for new customers to get you in the door. We’ve all heard the radio ads for cell phone plans, internet or TV. The ones with the quick voice rushing through the “fine print” saying “ for new clients only” or “on new activations”.

Banks are no different. So when your renewal comes up it’s the best time by far to do some leg work and get your tax documents together. Banks know it’s all too convenient to send back the renewal they mailed you. The one with an interest rate 0.50 – 1% higher than what’s available in hopes you won’t notice.

Penalty:

Life throws us curve balls so buying a house and living in it for 35 years is much less common. However even if you do stay in your home for that long, opportunity and or a financial threat might come along. In those cases, breaking your mortgage to refinance or sell might be the only option. If you have a variable rate mortgage your penalty will be about 3 month’s interest plus some minor admin costs.

However, if you have a fixed rate mortgage this is where banks really make a profit. Mortgage companies calculate your penalty using something called Interest Rate Differential (IRD). It’s the difference between your current fixed rate and the market fixed rate for the amount of time remaining. Ie. if you have 3 years left of a 5 year mortgage then your mortgage is compared to the discounted market rate of a 3 year mortgage. But banks do it differently. They don’t use your actual interest rate to compare to the market rate, they compare it to the “posted” rate for that 3 year mortgage which can be 1-2% higher. So instead of having a penalty of $2000-3000, often they’re $10,000 or $13,000. When I was a mortgage broker ten years ago I had someone come to me for help who’s penalty was just over $25,000!!

So how do you avoid this? Non bank lenders, called mono-line lenders, don’t have posted rates. Because of this, when a penalty is calculated it’s based on your actual contract rate. No from an artificial rate.

Pre-Payment Privileges:

Most mortgages that property owners obtain are considered “closed” mortgages. Meaning that there is a penalty if the mortgage were to be paid out in its entirety. By contrast, there are “open” mortgages as well.  For example a Home Equity Line Of Credit (HELOC). These can be paid off in part or entirely without penalty. But many closed mortgages still offer the borrower the ability to pay off the mortgage quicker than the set amortization period.

Some offer 10/10 or 15/15 and even 20/20. Those numbers represent the percentage of the mortgage that can be paid out in a lump sum, and the percentage of the payment that can be increased.

For example, if someone has a $500,000 mortgage and has a 15/15 prepayment privilege, that person could pay 15% ($75,000) in a one-time lump sum payment each year. Further they could increase their regular payments (monthly, bi weekly, weekly) by 15%.

This allows borrowers to pay down their mortgage without  committing to higher regular payments.

Let’s say at the end of each year you decide to apply your $5,000 tax refund to your mortgage. Or you come across some inheritance money. You could put a lump sum payment on your mortgage  without penalty.

In that scenario you’d save yourself about $128,000 and pay off your mortgage almost 7.5 years earlier.

Portability:

Porting your mortgage is essentially taking your mortgage with you when you move. It’s deregistering the loan from one property and registering it against another property. There are conditions of course, like you can’t sell your mortgage to someone else so it’s tied to both the property and the borrower. So, if you have a great mortgage rate or are concerned about the penalty to break your mortgage, you might be happy to hear about “portable mortgages”. If your mortgage isn’t portable, then you might be faced with a heavy penalty, or risk losing an awesome interest rate that you have.

It’s not uncommon for life to throw us a curveball. Or maybe your dream home comes up. But if your mortgage isn’t portable or you’re unwilling to pay a hefty penalty then you’re stuck.

Mortgage Structure:

In the mortgage world there is something called “standard charge terms”. This is basically a standard way of registering the mortgage against the property. But some banks use a structure called a “Collateral Mortgage” which goes beyond the mortgage amount. Think of it as a pre authorized amount on your credit card when you pay at the pump at the gas station. You say “fill up to $75” but you might only use $55. The gas station will put a hold on your card for $75 until you finalize the sale at $55.

Well, banks do the same. If you put more than 20% down payment on a home you could have access to the equity in your home up to 80% Loan to Value by way of a HELOC or second mortgage. But banks will put a “hold” on your home which locks up that equity so no one else can access it. Further they will sometimes register the hold beyond 80% so that when the home goes up in value that new equity is tied up as well.

This can tie your hands with ways to access your home equity but also increases the penalty you would pay if you needed to break your mortgage.

Investment properties:

If you’re buying an investment property the banks will be the last play you’ll want to start. The rules and lending guidelines for investment properties are always changing. So, going to a knowledgeable mortgage broker will be your best approach.

Think of it like buying a pair of headphones but only going into The Source to find them. Sure, they might have some but is it what you need, want and what’s best for you? Or should you go to Amazon or search the internet for all the other options available to you?

Lenders have different numbers of properties they’ll allow a borrower to own. They have different ways they calculate the rents and expenses as well as different ways they look at the number of units. And of course they apply much different interest rates to investment properties.

So, choosing the wrong lender might be the difference between being able to buy 1 property instead of 4. Or even being able to buy 1 at all!

So, do banks give the best mortgages? Sometimes. But usually not.