Tag Archives: negotiating mortgage rates

A $19,000 Mortgage Mistake

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As the sub title of the It’s Your Money book says: tools, tips and trick to borrow smarter. Today, I have a huge insight into the tip for you, and the trick of the banks to share with you.

On a $250,000 home purchase, a good rule of thumb is that you may be able to negotiate a discount on the sale of around three to five percent. At five percent, that’s a saving of $12,500. A great deal, but nothing compared to the savings, or wasted money, that can happen with your mortgage.

Last week, a listener e mailed me, and he was rather choked, to put it mildly. Last year, he signed a five year variable rate mortgage with his bank, with an option to convert to a fixed rate at any time. Seems like a good idea on the surface, doesn’t it? He had the benefit of the low interest rate, but when it started to move up, he had the chance to lock in a fixed rate for the rest of the four years left.

Well, it seemed like a good idea at the time. I’m very proud of this listener, because, before he went back to his bank to convert this variable rate mortgage to a fixed one, he got two other quotes. Very smart. So he knew that he could get a 3.9% five-year fixed rate in the market.

Yes, this listener also knew he was locked into the other four years with his bank. His shopping around wasn’t to move his mortgage, because the penalties would eat him alive. It was to be ready to negotiate the fixed rate on the last four years left!

But, and it’s a big but: He didn’t read the fine print when he signed the five year mortgage. Yes, he could convert at any time to a fixed rate, but it was at the POSTED rates! Let me put that another way: There is no negotiating when you choose to switch the variable rate to a fixed one. It will be at full sticker price. And like car purchases, who pays sticker? Well, he did!

The difference between the negotiated rate in the market and what the posted rate was with his lender is now costing him $19,000 in extra interest for the next four years! The banks will offer a very attractive variable rate on a five-year mortgage, with the option to convert to a fixed rate. But the catch, and it’s an expensive catch, is that the conversion will be at the full posted rates. A discount now in return for huge additional profits later.

$19,000 is a staggering amount of extra interest that was totally unnecessary if the listener had asked the question and read the documents he signed with the renewal. If your mortgage is up for renewal, you need to get at least three quotes and ask a lot of “what if” question. If you’re buying a home, you’ll need to spend more attention to your mortgage options and choices than negotiating on the purchase price. After all, you buy the home once, but have to pay interest for decades!

Answering Your Mortgage Questions

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Two weeks ago we talked about the risk of variable rate mortgages, in an environment where you have to know rates will start to jump up, vs. a fixed rate mortgage. Weren’t we smart, since five days later, the banks raised their five-year rates by 0.6%. And that’s just the start – stay tuned for more increases.

The story had a number of people ask some questions. So here are some of the notes of what you should keep in mind:

On a current fixed mortgage, the bank has guaranteed the rate, but you have signed for a penalty to get out of it. That is normally three months of interest, or something called an interest differential. That is the today rate vs. your rate right now, and takes the difference of what the bank would now be out if you just kept going.

The longer you have left on your current term, the higher that amount. Rough rule of thumb is that two years left or more, it probably won’t make sense to re-mortgage to today’s lower rate. If you have a year or so left, it’d be the three months of interest as a penalty.

But will paying this penalty and getting the chance to do a new mortgage save you money? That depends on what the saving in the rate is from your current mortgage to what you can negotiate today. It also depends on how long you intend to stay in your home. If you’re moving in the next year, there’s no way you’ll save money, you’ll just pay the penalty and won’t be around long enough to get the benefit of the lower rate. If you intend to stay in your home for a number of years, the savings will start to add up quickly.

What you need to do is:

-Get the amount of the penalty. There’s no cost to get it, but at least you’ll know.
-Your bank will offer you a blended rate. They’ll take the penalty and include it in your new mortgage payment. That may be what you can do, but don’t start there. Blending it in is not the same as shopping around for what may be a much better rate in the first place!
-Always get three quotes, and make one of them from the credit union. Their rates are the same or better, AND you will get money back at the end of the year through profit sharing, since you will be a member, not just a customer! For me, that’s like getting a quarter of a percent refunded each year.
-Lenders will guarantee a rate in writing for 60 days. That will let you shop around while you are protected on today’s rates, should they jump again! It does not mean you’re committed, or on the hook. It’s just a guarantee if you want to take advantage of it.
-Negotiate! You will always be able to get around ¾ to one full percent off their posted rates. Remember that posted rates are like the sticker price of a car – and who pays that?
-If you have a variable rate and want to fix it, or want to re-do your mortgage to a lower rate, you have to get the quotes and be prepared to take your business elsewhere.
-Yes, you can negotiate the penalty amount if they get to keep your business. I had a rental property with Scotiabank a decade ago. They wouldn’t budge on the three month penalty when I sold. But that meant they lost my principal residence mortgage. They made $1100 in penalty fees and have lost out on over $40,000 of interest income, because I walked. That didn’t make sense to me, but I got a great deal at the credit union for an hour of work.
-Last, but not least: When your lender says they “can’t” negotiate on the penalty, or the rate on a new mortgage, that’s just not true at all. Can’t means won’t! Remember that or it will cost you a lot of money. Yes they can, with approval of a manager, or even a regional manager. No does not mean no!