Banks are driving up mortgage rates much faster than anticipated, sparking a massive outbreak of confusion among consumers.
It’s an outbreak that has a high degree of contagion – advice from well-meaning friends, relatives or colleagues often seems to make the symptoms worse.
Part of the problem, experts say, is that every borrower’s situation must be evaluated individually.
For instance, it makes sense for a chef with little retirement savings to lock in the cheapest rate going. But that could be a bad move for a Bay Street financier who might want to pay down a chunk of her mortgage when she gets her bonus next year.
One of the cheapest long-term fixed mortgage rates right now is Bank of Montreal’s discounted five-year fixed-rate mortgage. But it comes with strings. Customers who sign on must agree to a term of 25 years or less, and their prepayment options are limited. The only way to break the mortgage is to sell the house.
For customers who feel that they might be coming down with a nasty case of confusion, “the big tip is sit down with an expert,” said John Turner, director of mortgages at the Bank of Montreal.
“For example, you may be in a situation where you want to pay off your mortgage quickly and you need to have access to prepayments,” Mr. Turner says. In that case, perhaps the lowest rate is the wrong way to go.
“Speak to a specialist, either a very reputable broker or a bank mortgage specialist,” Mr. Turner added. “Not every mortgage is created equal.”
Colette Delaney, senior vice-president of mortgages and lending at Canadian Imperial Bank of Commerce, agrees.
“The need for advice has never been higher,” she said. “Getting advice is probably the most important step in the process.”
CIBC’s special five-year fixed-rate offer isn’t as low as BMO’s, but it is offering something else: a “mortgage switch” offer that comes with 2 per cent cash back. That money could help cover the fees that the customer might be charged to get out of an old mortgage.
While seeking professional advice is key to mortgage shopping, experts stress that it doesn’t absolve borrowers from doing their homework.
“If you currently have a mortgage, get those documents, find out when it’s up for renewal, whether you have to pay penalties if you refinance,” said Kelvin Mangaroo, founder of Ratesupermarket.com. “Compare the market. There are a lot of great offers out there.”
Being an informed consumer can make a world of difference. Mr. Mangaroo said he knows of many scenarios where an individual has received a rate quote from their bank, and then has checked on the Web or with a broker or other bank and obtained a lower quote. “So they go back to the bank and the bank says, ‘Okay, we can match that,’ “ Mr. Mangaroo said. “The first offer from the bank isn’t the last.”
“Every lender is open to rate negotiation,” said Chris Wisniewski, a vice-president of real estate secured lending at Toronto-Dominion Bank. Even if a consumer has a favoured bank in mind, it’s not a bad idea to get competing quotes from a couple of others.
Buyers also would be wise to speak to both lenders and brokers because they might find the same mortgage going for different prices.
BMO is offering a lower five-year rate than most of its competition because the bank’s share of the mortgage market shrunk after it decided to stop offering its mortgages through brokers four years ago. The bank is now exceptionally eager to woo new customers.
Part of the reason that BMO decided to exit the broker channel was that, as chief executive Bill Downe explained in 2007, “our customers were confused because we were offering BMO mortgages through two separate channels at different prices.”
Home buyers who need time to sort out their options might want to consider pre-approval to lock in a rate. Bankers and economists suggest that the mortgage rate hikes aren’t over yet. By locking in, borrowers can rest assured that they have a guaranteed rate, generally for 90 days. In most instances, there are no penalties if they don’t take the mortgage.
Ms. Wisniewski has a tip for borrowers who are worried about the higher regular payments that come with switching from a variable-rate mortgage to a fixed-rate. “When customers lock in, they typically lock in to a five-year term,” she said. “Quite often the rate is lower on a four-year term, so that’s something to consider.”