Be a Loan Ranger

by Sandra E. Martin, moneysense.ca

Your bank doesn't take it easy on you when it comes to negotiating a mortgage , so why should you take it easy on them?

The mortgage on my downtown condo was coming up for renewal in March, and I dreaded it. For the past three years, I'd been paying the minuscule rate of 5.5%, and it looked like the good times were about to end. The bank had just sent me a fill-in-the-blanks renewal form that outlined my options, the least attractive of which (8.4% over 10 years) would add a $150-a-month "ouch" to my monthly payments.

Is this how it works? I wondered, my pen hovering over the form. No percentage points off for good behavior, no negotiation allowed?

If I had trusted the bank to have my best interests at heart, I would have ticked one of the boxes on the form and sent it back to my branch. Judging from the form, banks expect many Canadians do just that, blindly accepting whatever terms they're offered. But, as I was to learn over the next few weeks, a little bit of bargaining can accomplish wonders.

I began by asking my bank: "What else can you offer me?" Then I made it clear that I had been comparison shopping for my renewal — and the quotes I'd received from some of their competitors were very attractive. My bank countered with an offer on a floating-rate mortgage that's even better than my old 5.5% deal. Over the next few years, my new mortgage will save me thousands compared with any of the options that my bank initially offered me.

If you're a typical home owner, you too may be able to save $10,000, $20,000 or even more by knowing what to look for in a mortgage, then negotiating the best possible deal. Especially if you have a substantial amount remaining on your principal, you may be surprised to discover how much you can save by winning apparently small concessions.

Want an example? Consider this: a new homebuyer with a $100,000 mortgage who convinces her bank to reduce its standard mortgage rate by just a single percentage point — say, to 6.75% from 7.75% — will save $18,500 over the next 25 years. That's a nice reward for a little bit of negotiation.

This example suggests two simple yet crucially important lessons for mortgage shoppers. No. 1: every percentage point matters. And No. 2: negotiating a mortgage is a full-contact, no-holds-barred brawl between you and the lender. Whatever money doesn't wind up in your banker's pocket, winds up in your own. So it's worth your while to drive a tough bargain.

The good news is that there's rarely been a better time to shop for a mortgage. Since March, mortgage rates have dropped to near 25-year lows, while the already intense competition among lenders has accelerated to white-hot levels. Come to the market with MoneySense and we'll show you how to get the best deal on what might be the biggest financial decision of your entire life.


1. Ask for a discount

Posted rates are to mortgages what the sticker price is to cars — for suckers only. Fortunately, a better deal is as easy to cut as ice-cream cake with a hot knife. Provided you have a clean credit record, most lending institutions give you a full percentage point off posted rates just for asking. "In today's environment, you really don't have to put pressure on a company to get rate discounts or a better deal," says Angie Nonis of VanCity credit union in Vancouver.

To put her claim to the test, we asked a MoneySense Mole to go undercover as a prospective homebuyer in search of financing. And you know what? Nonis is right: our Mole came back with offers as low as 1.5 percentage points below posted rates, no yelling or string-pulling required. A polite "What else can you give me?" did the trick. The Internet-based bank ING Direct is even offering mortgages with the discount already built in. ING's standard deal is a full percentage point off posted rates at the major banks, in your choice of one-, three-, five- or 10-year terms, no haggling required.

That's just the beginning. With the right strategy, you can score an even deeper discount. Read on ...


2. Let a broker do the walking



You should always contact a mortgage broker before signing any mortgage agreement. It's that simple.

Brokers (some call themselves "consultants") "shop" your mortgage requirements around to several lenders, many of them small, regional or specialized outfits that you may not even know about. If a broker can't beat the rate you've been offered at your local branch — well, there's no charge for the broker's services, so you simply go your separate ways. But here's the best part: if a broker does find the mortgage you want, you still don't pay. It's the lender, not the borrower, who covers the broker's commission fees.

Laurie Golocevac never thought she'd use a broker. Like many people, the La Salle, Ont., mother of three assumed that unless you had credit problems, you were best off simply going to your local bank. She and her husband, Dan, secured their first mortgage as newlyweds through CIBC, when Dan was working as an apprentice plumber. Laurie's father co-signed the deal and the deal went off without a hitch.

"The bank held our mortgage while Dan was making $8 an hour as an apprentice for four years," Laurie recalls. The Golocevacs appreciated this gesture of confidence and intended to stick with CIBC.

They didn't count on the bank's reaction when they decided to buy a new home in 1995. By that time, Dan had completed his apprenticeship and had started a new job as a pipe fitter with Ford, where he was earning more than $100,000 a year. Still, CIBC turned the couple down cold when they applied for a new mortgage, this time without a cosigner. Why? The bank's rulebook says mortgagees must be continuously employed by the same firm for at least a year, and Dan had been in his new job at Ford for only eight months.

That's when the Golocevacs called on Michelle Enright, a Windsor, Ont.-based mortgage consultant whom Dan knew from high school. In a blink, Enright had them renewed through FirstLine Mortgages Inc. — a large residential and commercial lender that, ironically, is owned by CIBC. At 6.49%, their new mortgage was almost two percentage points lower than the best rate offered by CIBC at the time.

The Golocevacs could never have applied to FirstLine on their own, as it's one of several mortgage companies that deal only with brokers (First National Financial Corp. and Maple Trust are two others).

"We have access to lenders across the country," Enright says. Especially for homebuyers whose credit situation is unusual or spotty, brokers can often be invaluable in matching you up with lenders who may be more understanding than your local bank branch.

Finding a broker is easy. Many work in tandem with real estate agents and developers, so if you've begun to look at properties, chances are you already have a broker's business card in your possession. Alternatively, ask friends for recommendations, check your local yellow pages, or search online.


3. Choose a shorter term

Most of us pick three- and five-year terms for our mortgages because we like the security of knowing precisely how much we will have to pay every month for the forseeable future. But if you're willing to ride interest rates up and down, you can save a lot of money. Simply choosing to lock in for one year instead of five can cut a percentage point off the price of a fixed-rate mortgage. And choosing a short-term floating-rate mortgage can save you even more.

How about the risk of being sideswiped by a sudden increase in rates? According to York University finance professor Moshe Milevsky, the chances of that are relatively slim. He says you have a better than 65% probability of saving money by going short rather than long over the course of your mortgage. Milevsky recently analyzed interest rates over the past half-century and found the average homebuyer during that period could have saved $22,000 over the course of a 15-year $100,000 mortgage by choosing short-term mortgages instead of fixed five-year terms.

He cautions that not everyone should go short on their mortgage. If you're a first-time buyer and you've budgeted your expenses to the penny, you can't take a chance on interest rates spiking upward. But if you've already built up some equity in your home, or if you have a bit of a financial cushion, it makes sense to go with the odds and let your mortgage float in tandem with interest rates.

Floating your way to savings has become even more attractive with the introduction of new variable-rate products that give you the option of locking in for several years at a fixed rate if you think that interest rates are on the rise. If this concept intrigues you, take a look at any of the variable-rate mortgages that banks have introduced over the past couple of years, such as TD Canada Trust's Multi-Rate and Rate Advantage products, CIBC's Better Than Prime mortgage or Manulife One, an interesting new product that's a mortgage, a line of credit and a chequing account all in one.

In my own case, I decided a floating-rate mortgage made perfect sense since interest rates were high when my mortgage came up for renewal, but the business pages were predicting cuts ahead. Lo and behold, the Bank of Canada announced the first of several rate cuts in late March. By agreeing to ride with prime, I saved almost two percentage points off the best deal I found on a fixed-rate mortgage, and I'll save even more if the cuts keep coming.


4. Get chummy with your bank manager

Having a good relationship with your lending institution improves your chances of cutting a great deal. Rick Lunny, senior vice-president of real estate lending at TD Canada Trust, puts it this way: "When we've had a good experience with a customer, it allows us to be more flexible."

Remember that bank personnel are people, too. They differ in what they will approve and the degree to which they're willing to be flexible. If you find a manager or a loans officer that you can work with, consider following him or her from branch to branch even it means a bit of travelling.

But what if the sum total of your banking history is a credit card and the savings account you opened back in junior high? By drawing on family connections, even young first-time homebuyers can sometimes get a warm reception from lenders.

Just ask Sarah Luk, 30, and Victor Luk, 29. After living in Toronto and Calgary, the then-newlywed couple decided two years ago to settle in a small town in southwestern Ontario where Sarah grew up. Sooner than expected, they found an ideal property in their price range: a purple-painted brick fixer-upper with a separate garage and space for a garden. They wanted the house but they hadn't been officially preapproved for financing, and worried about losing out to other bidders.

"We had to move quickly," Sarah remembers. So they went straight to the bank where her parents had been doing business for more than 20 years. "It was a matter of my mother calling up and saying, 'My daughter needs a mortgage; what can you do for her?' " The bank responded with alacrity. and extended the Luks a fixed mortgage at a guaranteed rate of 6.25% even though posted rates were at 7.75% and rising.

The couple not only got a great deal; they're convinced they got better service as well thanks to their family connection. "It was our first mortgage, and we had a million questions," Sarah says. The mortgage rep pulled their financing deal together in just three days. "He answered all our questions and took the time to be with us."


5. Pile on the extra payments

Whenever you have some mad money, put it toward your mortgage. This easy strategy, which bankers call "prepayment," will save you a ton in interest over the long run, and help you pay down your mortgage much faster. If you have a $100,000 mortgage at 6.5% interest, paying just $1,000 extra at the beginning of every year for five years will allow you to shave 28 months of regular instalments off your mortgage repayment schedule and save more than $14,000 in total interest.

Don't think you can come up with $1,000 in a lump sum? Here's a totally painless way to increase your mortgage payments. I call it the Caffeine Cutback Cure. Curtail your coffee consumption by one medium-sized cup a day, and by the end of the month you'll have an extra $50 in your pocket (more if your taste leans toward fancy lattes and frappuccinos). Add that $50 a month to your regular mortgage payment and, over five years, you'll save more than $17,700 in total interest. What's more, you'll be on the road to owning your home outright almost four years sooner. You'll be amazed how hard just a few dollars can work in your favor.

So when that Christmas bonus comes across your desk, spend a little on something frivolous. After all, you worked hard for it. But use the lion's share to offset your mortgage and in a few years you can really have some fun.


6. Bulk up your down payment

If you put less than 25% down on a home, you have to take out what's called a high-ratio mortgage. Here's the rub: to get a high-ratio mortgage, you also have to buy mortgage loan insurance from the Canada Mortgage and Housing Corporation (CMHC), which protects the lender against the possibility that you might default. Insurance premiums vary with the size of your down payment, and can cost you as much as 4.25% of the purchase price of your home.

You can reduce your borrowing costs substantially by putting down the largest down payment possible — ideally 25%, or more if you can afford it. But beware of quick fixes. The dumbest way to boost your down payment is by taking out a second mortgage. For most people, this ends up costing way more than the high-ratio route. That's because second mortgages come at significantly higher interest rates than first mortgages, generally 10% to 17%.

There are better ways to boost your down payment to the 25% minimum level for a regular mortgage. The simplest (if less than exciting) option is to choose to buy a less expensive house. Another time-honored strategy is to borrow money privately from parents or other family members. First-time homebuyers can also tap into their RRSP savings through the federal Home Buyers' Plan (HBP). This program allows you to "borrow" up to $20,000 from your own RRSP, penalty-free, provided you replace the funds over the next 17 years. If you're buying a home with your spouse you can withdraw $20,000 apiece for a total of $40,000.

Just remember that as long as that money is outside your RRSP, you're losing tax-free compound growth — the magic ingredient that turns today's little dollars into big, luxurious retirement bucks. "The greatest danger is, you borrow money out of your RRSP and don't put it back," says Cynthia J. Kett of Stewart & Kett Financial Advisors Inc. in Toronto. If you don't replace your HBP withdrawal within the designated period, the outstanding money will be added to your taxable income, so you'll end up paying tax on it, on top of losing out on the potential for investment growth.

If you absolutely can't come up with 25% down, it's still a good idea to make as large a down payment as possible. "The higher the ratio, the higher the insurance cost," says Rick Lunny of TD Canada Trust. "So if you can lower the ratio, you're going to save money that way." For instance, putting down 10% instead of the minimum of 5% will save you up to 1.25 percentage points off your CHMC premium.


7. Tightwads love tight schedules

Forget the adage "slow and steady wins the race." When it comes to mortgages, speed is your friend.

Unless you specify otherwise, your mortgage will be automatically set up with a repayment schedule that assumes you'll pay it off over the next 25 years. You'll hear this schedule referred to as your amortization, or "am." But by trimming your amortization back to 20 years, you'll save thousands of dollars in interest and pay off the loan faster.

By shortening your amortization you end up paying a little more from month to month, but in the long run you save big time. Trimming your repayment schedule back to 20 years from the standard 25 will cost you just $70 more each month, and will save you almost $2,500 in interest by the time your mortgage comes up for renewal — and more than $9,000 in interest by the time you've paid off your home. If you can afford to kick in an extra $460 per month toward your mortgage, not only will you own your home outright in just 10 years — you'll save an astounding $75,000 in interest payments.

With that kind of money, you could afford to retire early; indulge yourself in a swanky little sports car with cash left over for auto insurance; even buy that cottage by the lake you've always dreamed about.