Sukhi Kang 604-377-1246 www.SukhiKang.com
Canadians may finally be grasping the obvious when it comes to how to get the best mortgage rate. Shop around.
Savings are basic once you are armed with information about the best rate and the best product. It has never been easier thanks to the Internet.
Google says it saw a 50% jump in the number of people using the term mortgage after one of the major banks announced it was cutting its five-year posted rate 10 basis point to 2.99%.
It is a relatively modest change but it comes as the spring market is about to kick in and consumers are thinking about purchases.
David Resnick, head of industry and financial services for Google Canada, says consumers actually start ramping up their search engines in January when they begin thinking about buying.
“We are seeing relatively similar volumes in mortgages that we saw last January,” said Mr. Resnick. “Whether it translates into home sales will depend on market forces but there is pent-up demand for housing based on what consumers are searching.”
The searching can yield some considerable savings, based on a recent study of the Canadian Association of Accredited Mortgage Professionals. It found the average consumer was saving 1.85 percentage points on a five-year mortgage in 2012.
In real dollars what does it mean? Consider a $500,000 five-year mortgage at 3% versus say 4.85%.
At 3% your monthly payment is $2,366.23 and your total interest over the term would be $69,346.66. Bump it up to 4.85% and the monthly rate goes to $2,865.48 and the total interest moves to $113,415.89.
Is there any reason to take the posted rate today, if you have an Internet connection?
CAAMP’s data shows first-time buyers get the need to shop around. The group’s annual survey found 47% of people who took out a new mortgage in 2012 used a broker.
“I think there is a whole generational thing that is happening with first-time buyers [using a broker],” said Jim Murphy, the chief executive of CAAMP.
But as educated as consumers have become, somehow that all goes out the window when it’s time to renew a mortgage. The same CAAMP survey found only 27% of consumers renewing a mortgage consulted a broker in 2012 – a percentage on the rise but still woeful when one considers the lost savings.
“They get something in the mail from the local lender six months before renewal telling them they are happy to offer you their best rate. Most of those people should be shopping around, a lot do but as your mortgage gets smaller, a quarter point doesn’t make a huge difference,” said Mr. Murphy.
That might be true as you whittle your mortgage down over time but by the time you get to your second mortgage, unless you’ve been making accelerated or lump sum payments, there is still much to be gained by shopping.
To go back to that $500,000, if you just make that monthly payment even at a 3% interest after five years you’ll be looking at signing a new mortgage for $427,372.86. Renewing at the posted rate for another five years would costs you more than $35,000 in interest over the next five years based on that 1.85 percentage point gap.
John Andrew, a professor at Queen’s University who specializes in real estate, says so much is negotiable in the mortgage sector, anybody not trying is missing out.
“I used a mortgage broker. Sure, they get paid by the lender and they have incentive to do business with certain companies over others but they are shopping around for you,” said Mr. Andrew. “They can probably get you a better rate than you can for yourself.”
He thinks while the Internet has helped people with negotiation, most are still scared to shop around. Mr. Andrew notes it is not just about rates but also the rules within the mortgage contract like the ability to make extra payments.
The key is to shop around. Not just on your first mortgage but every mortgage. That’s something Canadians still must learn.