Article of the Week – Before you Sign…
There’s a one-in-four chance that, if you’re among the 5.7 million Canadian households with a mortgage, you’re going to receive a letter in the mail this year telling you it’s time to renew.
Negotiating a mortgage is a bit different than haggling in a souk, but just barely. (hint: it’s not all about the rate)
TD Bank Financial Group said the number of renewals each year has climbed to 25 per cent as homeowners have switched to shorter terms, leading to more mortgages coming up for renewal every year.
“Traditionally, homeowners have gravitated to five years, that has been very popular,” said Pat Giles, associate vice-president, real estate secured lending, TD Canada Trust. “In recent years, we have seen the popularity of shorter terms emerge, the two-year terms, four years — meaning sometimes they (merge into the same renewal time) in one year like this.”
A 2014 report from the Mortgage Professionals Canada, which represents the mortgage industry, found 20 per cent of those customers coming up for renewal each year will switch lenders to seek a deal — something consumers are generally loathe to do because of perceived costs.
A better deal can include better terms, like large lump sum prepayment options, or it might mean just a straight out better rate. The difference can be meaningful: Discounted five-year closed fixed rates are as low as 2.3 per cent, but the posted rate at major banks is now closer to 4.8 per cent.
Rob McLister, the founder of ratespy.com, said consumers have become more sophisticated and banks generally send out renewal notices with somewhat competitive rates, but he says it’s not unheard of for a consumer to just sign on the dotted line and send back a renewal notice at the posted rate that arrived in the mail.
“I think the conversation and consideration about renewal is happening even earlier than when (consumers) get something in the mail,” said Giles, citing a Canada Mortgage and Housing Corp. survey last year that found 60 per cent of Canadians will renew early.
He says that at 120 days before renewal you can lock in at a new rate without facing any type of penalty, something attractive for consumers worried about a rising rate environment.
Giles says TD will offer a “competitive rate” whether in a renewal letter, online or at an in-person meeting with a bank representative. Some mortgages include options like missing a payment or increasing your monthly payment, and the bank will work with the customer to find the mortgage that fits their lifestyle, he says.
Is it worth shopping around? Giles says customers can always review their options.
“I think it starts with a conversation (with your bank),” he says, adding that homeowners’ lifestyles can change dramatically from when they first received a loan. “They might have gotten a raise, so they can pay faster. Maybe they are caring for an aging parent and there’s a bit more cost (and a need for flexibility).”
The Internet has made it easy to shop and compare mortgages and rates online, but Giles warns that it’s the equivalent of buying a suit off the rack. “You want to go in and get a tailor to make sure it really it fits you,” he says.
But McLister, a long-term mortgage industry insider, says banks have become more sophisticated about the way they target consumers, so the days of consumers simply re-signing for the posted rate are almost over. “It definitely still happens, but it’s not as frequent as a decade ago,” he says.
McLister says the banks are spending millions and millions of dollar to research what buttons to press for a given consumer, making the whole process far more scientific. “They never know what they can get away with (in terms of an offer) on an individual client, but they know from a portfolio level what they can get away with. They study the numbers and know if I offered X type of client profile it has had this success rate.”
In 2015, CMHC found among people renewing their mortgage about 86 cent will remain loyal to their financial institution. Among first-time buyers, only 47 per cent remain true.
At 63 per cent, the interest rate was cited as the number one reason for switching lenders. Despite that, 58 per cent of people surveyed indicated an existing relationship with a bank was a reason they wanted to remain loyal.
McLister says financial institutions don’t just know what rate to offer to gain acceptance but when to put that offer in mail, including even the way they write the letter.
“They know how to address the client’s objections when they say they saw such and such rate on the Internet and ask ‘why am I getting a higher rate’,” he says. “Every step of the renewal process is tightly choreographed from the Big Six banks.”
He says the bottom line is do your homework. You can get a hold guaranteeing you a rate for 120 days that is “somewhat” competitive, if you are worried rates will change before your contract is up. A 60-day rate hold will mean a better rate.
“People stay (with their lender) because they know them. There is comfort, it’s known. But the second thing is convenience. It can take two to four hours of your life, minimum, to switch lenders. There has to be something it for you,” said McLister, adding that includes factoring in the legal fees with switching lenders.
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