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The Inside Scoop on the Mortgage Renewal Process
by Rick Hoogendoorn
Jeff: So basically what I focussed on was the mortgage renewal process and as we started discussing, I'm assuming people already have a mortgage and it's time for the term to mature whether it be a one, two, or five year mortgage. The bank often, bank or institution, sends you a mortgage statement saying it's time to renew your mortgage, it matures in July or whatever the maturity date is, and in that renewal letter they'll give you what your balance will be at maturity, and then they will often give you the renewal options of 1,2,3,4,5 year renewal options. What the payments would be and what the interest rate that they're offering you at that time. Often, especially with the large chartered banks, they'll just offer you the posted rates that you'll see in the bank. They won't give you the best deal that they're willing to offer, say, a new client. The deal they probably offered you to lure your business in the beginning when you bought your house or arranged a mortgage with them. So that's one thing you have to watch. Rick: So, is there a way to get a discount rate even though you're an existing bank customer? Jeff: You should probably check the newspaper or call a mortgage broker and find out what competitive rates are available. Now obviously it's the type of property, location, things like that that will impact what lenders are willing to do. If you have a mobile home, you can't expect the same rates, or if you had a house in Tahsis, you know, there would only be a few lenders that would want to lend in that area, but if it's Victoria, you know, metropolitan locations, then most lenders will sharpen their pencil and give you the best rate possible. Rick: So the first step is to find... Jeff: The first step, you know, a lot of the newspapers have an ad from a mortgage broker of what the best 5 year rate would be, or comparable term rate would be, and then you should go back to your institution, I believe, if you want to stay at that institution. If you don't want to stay there then it's time to move. You know, they've ticked you off, or you don't like the way they handled your account that wasn't necessarily your fault but, you know, whatever. But you should go back to the bank before you waste too much time, yours or a mortgage brokers, or another institutions, to find out what they're willing to offer you. Rick: So, by contrast, you were mentioning the other day, somebody goes to a mortgage broker to get a rate and then goes back to the bank. Jeff: That's right. I don't want to do all the work of finding a new loan if the Commerce bank or whatever the institution is, is just going to match me or beat me by one basis point to keep their client. Rick: Does that happen often? Jeff: Ya, fairly, ya. Rick: So somebody goes shopping around… Jeff: Someone gets their renewal, then they go shopping around and then they contract or hire a broker to find them a new deal. You get down that road where you get approval at the big discounted rate and then their institution matches it. Now there are times in the cycle where you get say life companies that will give a lower rate than the institution would so you can still beat that rate that the institution is willing to sharpen their pencil at, but it’s a bit of a mug's game in a way that there are some costs to move your mortgage. Rick: What are the costs to move your mortgage? Jeff: There's a discharge fee that's charged to take that bank and discharge the mortgage off. It's usually about $125 to discharge. So they sign a document at Land Titles so that they're no longer charged on your property. There might be other costs to move your mortgage. There could be a new appraisal required for a new institution unless you're loan to value is low enough. So you own a house that's worth $100,000 and you only owe $50,000 mortgage, they may just take that BC tax assessment value and use that for their underwriting. Rick: So it's not on the line in any way. Jeff: Ya, it's such a low risk that they're, but often, you know, they'll either have a drive-by appraisal for $100 or a brand new appraisal for $200 or whatever would normally be charged. Some institutions will eat that cost but it depends. And it depends on the market cycle. Sometimes they get aggressive and sometimes they don’t. If you just transfer your mortgage, ie. the document, there's usually no legal fees other than maybe a lawyer witnessing your signature on the new document so it might be $50 or $100, which sometimes will be swallowed by the institution, or the mortgage broker may use part of his finders fee to cover that cost. Rick: So is that something somebody would ask for? Jeff: You want to find out what all the costs are. If it's a CMHC mortgage, ie. it was insured, there is usually no new appraisal required because really it's an insured mortgage, and stays insured even though it transfers institutions. Uh, if you change the amount of money, ie. you want to go to a larger amount, then there could be new mortgage documents. So then you're into a whole new set of lawyer's fees, you know, $500-$700 depending on what's involved. You've got the discharge from the original place and a new document and a registration so… Rick: So there isn't really an advantage in that instance over, so if somebody wanted to take out more money and their strategy is to wait until my mortgage comes due and then I can refinance at that time as opposed to taking out a second mortgage in the middle of the term, they're not really ahead in terms of costs? Jeff: Well a second mortgage is going to have new legal fees attached to it. It may have a new appraisal, the whole works. So you've gotta watch. It depends what your needs are and why you need the money and when you need the money. You know, don't go get a second mortgage if you've got only a month or two to maturity. Blend the whole thing into a new one, unless you have to. You know, RevCan's on your back and you've gotta pay them, or something like that. Rick: When you're talking about this whole process of the banks offering you posted rates, you're now going 'well I'm going to go somewhere else. I'm going to go to a mortgage broker and deal with them', a lot of people I know would go 'well why doesn't the bank just offer me, why didn't the bank offer me the discounted rate before I went through all this?' Jeff: Well, because I imagine their stats show that a lot of people, and I wouldn't know what the percentage is, let's say 20%, just sign it back and think that's what they have to do. Maybe it's higher than that. I don't know what the statistics are. They certainly aren't probably going to divulge that information, so it's very profitable for them. Rick: So they're playing on human nature to not bother… Jeff: …and intimidation probably. You know I think a lot of, there would be a percentage of the public that just, for example, says, 'well, oh I've dealt with the Commerce, they've got my mortgage, they've got my bank accounts, that's where my mortgage is, I'll sign here, thank you very much for your money, for lending me your money, so I'll just sign back and be a good person and I won't cause any waves. The informed consumer, and more and more people are becoming informed consumers, are suspicious of the banks and the fees and all that they pay during the course of a year. The other thing I won't to point out is just about all mortgage renewals come with a renewal fee. Probably about $85 that they want you to pay in addition to have the privilege to have them extend the term, or renew a term. You call them up, they'll waive that immediately without even a question. But there will be a percentage of the public that don't question it, and just allow them to take another $85 out of their bank account, or send a cheque. Rick: Are there any instances where they would insist on the $85? Even if you challenge them on it? Jeff: If they do, it's time to move. Make sure you can move, before you tell them you're moving… Rick: What kind of circumstances would mean you couldn't? Jeff: You might have changed your job. You may have lost your job. You may have run into some credit problems, so you may not be as mortgageable as you were when you originally arranged the mortgage. Rick: So just because you qualified for your mortgage 3 or 5 years previously, doesn't mean you now will automatically qualify. Jeff: Right. And often on a renewal from the institution, they're not going to go through the underwriting process of confirming you have a job. You know, they can see what your payment history has been and if it's been spotless or within their parameters their happy to renew. If you've bounced every third cheque, or made your payment 5 days or ten days late when you were contractually obliged to pay on time, they may not offer a renewal. They may tell you that they're not going to renew, in which case you've got to go and find another lender anyhow. But to keep it simple, I'm just assuming it's status quo all along, and it's just up to renewal and let's go on. Rick: So you're not saying everybody who has a mortgage coming due should go and see a mortgage broker. Jeff: No, I'm saying what a comparable rate would be available to you and you can probably do that just out of the newspaper through whatever a mortgage broker is offering, ads, or just one or two phone calls. Probably just one phone call because every mortgage broker is going to be able to offer you the same, low, discounted rate as the next guy. So you don't have to do a lot of shopping. But if you are going to then decide you don't like your institution or they won't bend and won't offer you the best rate, you know, within parameters, you know, a big enough discount that you might get elsewhere, then you've got to, it's like a new underwriting process. So you're going to have to do a new application, either at a new institution or through a mortgage broker. You're going to have to have income verification, a job letter. Probably your last year's Notice of Assessment, if you have a salaried job, just to show you don't owe taxes from the previous year to RevCan. Or if you're self-employed, they'll want to see the last three years' Notices of Assessment so they can take an average of your self-employed income. You probably want to dig out your old mortgage document (ie. the one that got registered by Land Titles) that your lawyer should have provided you with. Just to make sure your mortgage is transferable. Some mortgages can have peculiarities to the lender that are transferable. They may have a little quirk on some of them like maybe it was done by Household Trust or something like that and there's something the new institution can't live with. So you've got to make sure the new institution is happy to take the existing document as their security, otherwise you're going to have to have a new mortgage drafted by a lawyer and so you're back into that $500-$600 cost. Rick: So let's say a person has a mortgage coming due, they have gone around and looked at the newspaper, they have gone back to the bank and the person, for whatever reason, is still wanting to move. At that point, they could go to another financial institution or a mortgage broker. Under what circumstances would they choose a broker over just another financial institution? Jeff: A broker will be able to arrange the cheapest rate available to them. He will know what the cheapest rate is. You can go to a different institution and they may not be able to offer the biggest discount. Some of the biggest discounts are only offered through brokers because if you go to an institution at the branch level that person you're dealing with at a branch gets paid a salary. He's got desk space. He's got benefits. So there's real costs. So a lot of these financial institutions, including the banks, would rather source their mortgage business through brokers because they don't have any of those costs, and they're willing to pay a finders fee for it, so that's a cost to the institution. But if they don't want to be in that market anymore, ie. five years ago Laurentian Bank was the best deal around. It was the cheapest rate, paid brokers well, but then they thought they had enough mortgage exposure in BC or Western Canada and basically they priced themselves where you wouldn't take a deal to Laurentian Bank because it just wasn't competitive. Our job as a broker is always to find the lowest rate to the borrower. Rick: So what the institutions are doing, is they're managing their portfolio of mortgages and if they're full of a particular type of mortgage, or if they're over-exposed in that area, they won't discount that rate for that kind of mortgage. Jeff: That's right. They'll just price themselves out of the marketplace. Rick: So you may have a house or a kind of mortgage that they're just not interested in having. Jeff: Like condos. You know, when the leaky condo crisis first emerged there were very few lenders that would lend to a condominium. Now there aren't any institutions that will lend to a condominium unless it has an engineering certificate saying it's not leaky, or if it is leaky the strata has gone through a process of calling for the special assessment. Once the special assessment's been declared, it depends on the lender. As long as there's an engineering certificate and a contract in place then banks will, like in this building for example, you can't get a bank mortgage on it. Not available. Rick: If somebody comes to a mortgage broker, are they having to pay any up front fees or is that something that's merely covered by the institution paying you for placing the business with them? Jeff: The costs that will be involved. There's a discharge fee. Getting rid of your existing mortgage... Rick: Which is paid to the bank. Jeff: Which is paid to the previous bank. Which may be covered somewhere in the new transaction. Either from the new institution or maybe the mortgage broker, who knows. There may be an appraisal. So those are the costs that the public's got to be aware of. It's just a transfer. If it's a change of mortgage, ie. you want more money, there may be new legal fees on top of that. Rick: But you're not having to charge a fee, yourself? Jeff: I'm paid by the lender, unless you can't find a lender that will pay you in which case then I do charge a fee. Rick: Is that common or is that uncommon? Jeff: It's more uncommon because most people...it depends if you qualify. If you've got poor credit then lenders aren't going to want you. You know, you end up into a 'B' lender and basically the job of the mortgage broker is to start at the bottom rung of the ladder where the cheapest money is and you work up the rungs of the ladder to find who will lend to that deal, to that borrower. Whether it be the borrower's problem because of income, credit or the security, the house the condo or location or whatever. Rick: So does a broker have more possibilities available to them because they're dealing with a multitude of different lenders? To deal with those kinds of problems whereas one financial institution will say you either qualify or not? Jeff: No, different institutions will have a different appetite and a different product. If you don't meet your bank's criteria, they won't lend you the money. It doesn't matter what you want to do. Like mobile homes. There are very few lenders that will lend to a mobile home. There are some. There probably isn't a lender that will lend to a mobile home and pay you a finder's fee. So you would have to charge a fee on something like that. Mobile homes on land is a little different. If you own the land the mobile home is on and it's affixed to a foundation. If it's just on pads then it's different. So what do you need? You need, if you're going to transfer to another institution or through a mortgage broker, you're gonna need your income verification, a letter from your employer. If you're self-employed, you're gonna need your last three years Notices of Assessment from RevCan. Not just your T-1's because anybody can write a T-1. But the Notice of Assessment is the computer printout from RevCan that verifies you did file the tax. It shows a couple things. It show the income declared and it also shows whether you owe tax or not. Very important. You probably want to get a copy of your mortgage statement to know what balances you're transferring. And you probably want to get a copy of the document which will actually show which different terms and conditions are attached to that mortgage document. It will also give the registered number for the mortgage so that they know what documents they're transferring. In fact, that's also on the mortgage statement, but it may not be. But I think it's important for people to know that the bank probably isn't offering you their best deal. Some of the life companies will start out offering you their lowest rate because they know you're gonna shop around. My guess is that if you're dealing with the bank, you're getting the posted rate. Rick: One thing people aren't recognizing is how much money it actually adds up to if they shave a half a percent off their mortgage over years. We're talking thousands of dollars. Jeff: Over 25 years you're talking probably tens of thousands of dollars. If you pay your mortgage off at the 25 year amortization… Rick: At the posted rates... Jeff: ...at the posted rates vs. a discounted rate… Rick: So, to go to sleep on this issue is really not a good idea. Jeff: It's folly, for sure. And the bank may only cut 1/2 a point, or 3/4 of a point off your three year rate. You know, that's why you want to know what the market is because the market could be up to a point, to a point and a quarter off a five year rate. Know where the market is. Don't pay the $85 renewal fee. And if you're not happy, find someone you can deal with to port your mortgage, but usually the easiest thing is to call the 800 number on your statement and say ' okay, is that really what you're offering me?" And by the way, I'm not paying this $85 renewal fee. What do you say about that? Say that after they've quoted you the best rate. And once you've got the best rate, if you're not happy, then move. Once you've twigged them that you're shopping, if that's the best they're gonna give you, it's not fair, I don't think, to then go hire a mortgage broker or another institution to do all this work for an approval and then go beat up your institution again. That's not good business practice. Rick: If a person goes to a mortgage broker and they end up with some institution they aren't really familiar with, would they have to be concerned about the financial stability of that company? Jeff: Never. Because if ABC Financial goes under, you still owe the money and someone will pick up that paper and you will make payments to whoever buys that paper. Rick: At the rate that you've agree on? Jeff: That's right. You know, it's a contract. It stays there. And chances are, if you have a CMHC insured mortgage with the Royal Bank, the Royal Bank doesn't own your mortgage. They pool them and they sell them out to a pension fund or some other investor. Royal Bank still cashes your cheque and administers that mortgage on behalf of the new owner, but you don't know who owns the debt on your house. You never do. Rick: Is there any higher risk of foreclosure with different companies? Jeff: They can't foreclose unless you're in default. Default meaning you haven't made your payments or you haven't paid your taxes and you don't have insurance. And you haven't destroyed the property. So however your mortgage defines default. If you're not in default, they can't call your mortgage, unless it's an open mortgage and then they can call it at anytime. Jeff Moses is a mortgage broker with Great Pacific Mortgage & Investments Inc. of Victoria, BC. We thank him for helping our clients better understand the mortgage renewal process.
Financial planning, estate planning, retirement planning, insurance planning, tax planning, insurance products, segregated funds, and tax preparation services mentioned herein are offered through Cheri Crause & Associates Inc. . |
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