Monday, November 1, 2010
Mortgages: Bank vs Mortgage Broker
When meeting with a client for the first time, I try to gather as much information about the buyers as I can while keeping the buyers as comfortable as possible. We have to discuss finances. Not a comfortable subject when you don't know eachother. It is very important to get your finances in order as you start your journey into home purchase. The more information that you can gather, the easier your journey will become. One of the mortgage broker's that I have recommended in the past has provided some information that might be useful to you. Read on and make your own conclusions.
What your bank does not want you to know
A lot of clients come to us with a familiar situation: Two, three or four years ago they were tempted by what seemed like reasonable rates to lock into a 5 year mortgage. Now, needing to break their mortgage - to pay out some debts, renovate, and so on - they are presented with a penalty that seems to bear no relation to reality, a penalty sometimes running $5,000, $10,000 or more. The primary reason for these high penalties is the use of “posted rates” by the banks. It sounds great to get a large discount from these bank posted rates until you realize that when you break your mortgage, they will come into play again, this time in reverse. Banks will calculate your mortgage penalty as if they had given you the higher, posted rate, and that high rate makes for the excessive penalty you pay.
To deal with this penalty, banks typically present clients with a few options: clients can break the mortgage and pay the penalty and start again with a new term at today’s rates, or they can accept a ‘blended’ rate which extends their mortgage back out to 5 years at a rate that combines their current mortgage with the going market rate for a 5 year term. No penalty needs to be paid up front because the fee is buried in the new ‘blended’ rate.
So clients are tempted with the same offer: rates that seem reasonable, and the possibility of locking those low rates in for another 5 years. The conversation your bank doesn’t want to have with you is the one that outlines what your new penalty will look like down the road if you need to break your mortgage again. Which, statistically, you will probably want to do. Remember, before signing on the dotted line...GET THE FACTS YOUR BANK WON’T TELL YOU.
What you should know
So what is the right thing to do in this situation? The short and easy answer is that if the cost of breaking your mortgage, (including any associated costs like discharge fees and legal fees) is less than what you will save over the remaining length of your current term, then it is advisable to break your mortgage and reap the benefits. Even with high penalties that sound extravagant, we have helped clients save thousands of dollars breaking their mortgages.
Beware of the temptation to lock back into a 5 year mortgage with your current lender. After all, if you are considering breaking your mortgage before your term is up, you are just doing what the banks know their customers will do: most Canadians will not see their mortgage through to the end of their 5 year terms. So why, knowing this, would the banks recommend that their clients lock in to 5 year fixed rate mortgages? Because the bank will get its money whether you pay them faithfully for 5 years, or whether you pay them a penalty after 3.
We do things differently. MonsterMortgage.ca will assess your personal situation to uncover the most suitable lender and product so that you get the mortgage rate, terms and conditions that are right for you...and NOT YOUR BANK!! And because many of the over twenty lenders that we recommend our clients use do not use posted rates, if locking in at today’s historically low rates is the right strategy for you then you can avoid a harsh penalty should you need to break your mortgage down the road. By opting for variable mortgages, or a shorter fixed term mortgage, many of our clients avoid these large penalties altogether.
So the question is, why do many people lock back in to a term they probably won’t complete? Habit I guess, and a history of the banks selling you advice that contributes to their bottom line and not yours. We are all creatures of habit. Call me today and break your bank habit. We will review your mortgage and present you with a strategy that helps you pay down your mortgage faster.
Betty Bartusevicius, Sales Representative
Re/Max Realty Specialists Inc., Brokerage
OFFICE: 905 828 3434
DIRECT: 416 427 1875
WEB SITE: www.bettybart.com
not intended to solicit buyers or sellers under brokerage contract