Whether it’s a palatial residence, a trendy condo or a tiny bungalow, a home is the most expensive thing most Canadians will buy in their lifetime.
For a nation known for its love of discounts and reward programs, you’d think we’d be all over getting the best possible deal on our mortgages. But over and over, research suggests the opposite is true. Most recently, a global poll by banking giant HSBC found that Canadians were the least likely among current and prospective homeowners in 10 countries to have done some research looking for the best mortgage rate. A mere half of respondents in Canada said they had shopped around, well below the global average of 61 per cent. By comparison, among the French, who topped the ranking, the share of bargain hunters stands at nearly 80 per cent.
Needless to say, comparison shopping can save you a pretty penny when it involves something worth hundreds of thousands of dollars. But with interest rates now creeping up, it’s arguably even more important not to sleep-walk into your mortgage agreement.
So how does deal-hunting work when it comes to mortgages?
There are three main ways to go about it, and all of them have their pros and cons, according to experts.
These are websites that allow you to compare mortgage rates from a variety of lenders with just a few clicks. The biggest ones in Canada are Ratehub.ca, RateSpy.com, LowestRates.ca, and RateSupermarket.ca. All of them allow you to look for rates available in your province and to narrow down the search by mortgage types (fixed or variable) and term duration.
Rate-comparison sites are a great place to start your mortgage research. Whether you are comfortable with a DIY approach and ready to contact lenders directly or would like a bit more hand-holding through a mortgage broker or mortgage professional at your bank, you should have an idea of what the mortgage market has to offer before you dive in, said Sean Cooper, author of Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians.
It’s a good idea to replicate your search across all the major sites, as not all available lenders and deals are listed on all sites. Keep in mind, though, that some of the lowest rates you’ll see online come with strict conditions you might not meet. Also, some offers featured on rate-comparison sites are available only through the mortgage brokers that advertise them.
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Pros: Doing your research through rate-comparison sites is a lot easier than collecting quotes directly from lenders – and you’re probably getting a lot more information than you’d be able to gather on your own. If you’re a pretty standard mortgage applicant and aren’t afraid of handling the mortgage paperwork on your own, this is your one-stop shop.
Cons: These sites are good for “cookie cutter borrowers,” those with a credit score of 700 or more and steady and easily verifiable income, said Robert McLister, founder of RateSpy.com and mortgage planner at intelliMortgage.com. If your credit is less than perfect or you’re self-employed or on commission, a mortgage broker is generally a better option, he added.
Also, much like Google searches, comparison sites often feature “sponsored” mortgage rates at the top of search results, even though these aren’t necessarily the best deals, Cooper noted. Make sure you aren’t selecting an offer just because it’s the first one on the list.
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A mortgage broker is a middleman between you and the lender. The good news is that it’s usually the lender, not you, who pays the commission.
A mortgage broker’s job is to find you the best mortgage given your financial situation.
Pros: Mortgage brokers offer a more “personalized service,” McLister said. They walk clients through the mortgage process and might even throw in a freebie, like covering the home appraisal fee, Cooper said.
Also, brokers working at large, high-volume firms will often sacrifice some of their commission in order to negotiate an even better rate for you, McLister said. This can shave between 0.15 and 0.20 of a percentage point off your mortgage rate, he added.
Cons: Because mortgage brokers are paid by lenders, some wonder where their loyalties lie. “Mortgage brokers position themselves as an unbiased source working in your best interest, but I question that statement, in that many brokers have relationships with real estate agents and also banks, for that matter. They want you to take out a mortgage and many will try to qualify you at any cost,” said Robb Engen, a financial planner based in Lethbridge, Alta., and co-author of the popular personal finance blog Boomer and Echo. Cooper advises taking a close look at disclosure documents and speaking with a few brokers before settling for one.
Keep in mind that mortgage brokers don’t work with every single lender you see listed on rate-comparison sites, so the pool they’re drawing from when looking for the best rate is smaller. And some financial institutions don’t deal with brokers at all, Cooper noted.
You should also know that not all mortgage brokers are created equal, Cooper said. “Some brokers are more experienced than others,” he told Global News. He recalled hearing of a rookie mistake made by a young broker who set up a client who had said he might need to move across Canada in the future with a mortgage offered by a credit union, which can only operate in one province.
Finally, “there is a possibility that you’ll pay some sort of fee, if you’re a more complicated case,” Cooper said. Brokers can help you get a mortgage when the big banks won’t, but they often charge you for the extra hassle.”
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Negotiating with your bank
Still, a print-out from a rate-comparison site might not be enough, Cooper cautions. “You bank may not be willing to budge unless you can prove you really can get that rate,” he said. And that may mean showing up with a written commitment from one or more other lenders. The risk with that, though, is that too many credit inquiries might damage your credit score, he warned.
Pros: Your bank will likely throw in some perks to reward you for your loyalty, such as paying for the appraisal fee and waiving bank account charges, Cooper said. Although brokers also do this sometimes, lenders generally have “bigger pockets” and can be more generous.
Another thing to know is that, the new federal mortgage rules waive the stress test when you renew your mortgage with your existing lender. The flip side of that, of course, is that this diminishes your negotiating power when it’s time to discuss your renewal rate.
Cons: Lenders will only sell their own products, so your choice is limited. You may need to do a considerable amount of legwork to be able to effectively haggle for a lower rate.
The lowest rate isn’t always the best mortgage deal
A low mortgage rate is good, but don’t get excessively hung up on a single number. There are a lot of other conditions attached to a mortgage that will affect how much the loan will actually end up costing you, McLister noted.
In addition to interest rates, you should pay attention to prepayment privileges, penalties, portability, and refinancing restrictions, according to Cooper and McLister.
- Prepayment privileges: How easily will you be able to pay down your mortgage ahead of schedule? That’s an important question to ask as interest rates rise and a bigger share of your monthly payments starts flowing toward interest charges rather than the principal. Non-bank lenders might both lower rates and offer more generous prepayment privileges than the big banks, according to Cooper.
- Penalties: What if you moved, got divorced, lost your job and needed to break your mortgage? It happens more often than you think and that can cost them thousands of dollars in penalties, which is why it’s important to look at the fine print. Breaking up with the big banks, in particular, can be very expensive if you have a fixed-rate mortgage, according to Cooper. Refinancing your mortgage before maturity may also trigger these penalties, McLister noted.
- Portability: Speaking of mortgage penalties, one way to avoid them if you move is to have a portable mortgage. This means you can transfer your mortgage to your new home and combine it with a new loan, if necessary.