The point of this post: do the work to understand how the mortgage lending system works so you can save the most money.
If you want to get the very best interest rate (read: lowest bottom line price) on your mortgage, you need to know how to see yourself the way the bank does.
No, not like that. (Well, sort of like that.)
Really, you need to understand how lenders determine the value of your mortgage business so you can use that information to wring the very best deal out of them.
1. Save up for a real down payment. No, really.
It seems that everyone wants you to get into the housing market as soon as you possibly can. There’s a lot of talk (from lenders) about making the housing market easier to get into for first time buyers. When you hear that, translate “easier” to “more profitable to lenders” and you’ll be hearing what they really mean.
Every dollar you can put towards a down payment on your first home is a dollar you won’t be paying interest and CMHC default insurance (to insure the lender, not you) on.
Saving up a hefty down payment comes with a load of benefits to you, not least of which is the fact that it should get you into the habit of saving for a specified goal, and reduce the sticker shock that a mortgage payment, property tax, insurance, utilities, and maintenance on your new house can produce.
It also saves you money on the bottom line price of your house. It’s easy to sit in front of a mortgage lender and not really pay attention to how much money you’re spending beyond the actual sale price of the house you’re buying, because everything is presented to you in only one number: your monthly payment.
Don’t let be lazy. Figure out what a 20% (or more) down payment is on a house that you can reasonably afford, and save like you’ve never saved before.
2. Get a copy of your credit report and pay the extra money for your score.
Most lenders only pull a report and score from one bureau (and they have absolutely no obligation to tell you what your score is or what details are in your report), but if you want to be really on the ball, get a copy from both credit reporting agencies in Canada and cross-reference them.
The first benefit of pulling your own credit history (and no, it doesn’t lower your score when you do it) is that you can fix any errors you see on it before you start the mortgage shopping process, or – if your score or history is pretty poor – spend the next six months making sure that every payment is made on time and you never go over your credit limits.
The second benefit is that you can get the most accurate rate quote from a bunch of lenders without getting your credit record pulled multiple times (see #9). The lender can’t actually submit an application based on the strength of the credit bureau report you give them, so they’ll eventually need to get one for themselves, but this way you can limit the amount of inquiries against your record to one.
3. Get to know your own numbers.
Sit down with your tax return, current paystubs, and credit report and do some math before you start getting quotes on your mortgage. If you have variable income because you’re paid hourly or are self-employed, figure out what your average income has been for the past two years.
Write out how much you make (before taxes), how much you have to pay on loans, lines of credit, and credit cards every month (you know what I’m going to say if this number is large and you’re thinking of adding a mortgage to the mix, right?), and a short list of your biggest assets (savings and retirement accounts and vehicles, mostly).
The hour that you spend on this will save you an enormous amount of time when you start shopping around for a rate, believe me. It might even help you get some clarity on your personal finances while you’re at it.
4. Leverage your other business.
To the bank (as an institution), you are a walking dollar sign, and they really don’t want you to walk away. In fact, they want as much of your business as they can get their hands on, and if they already have it, they want to keep it.
If you are already a customer, walk into your appointment knowing the value of your business. How long have you been with them? Do you have accounts, loans, and savings with them? It matters.
5. Understand the different mortgage flavours.
Variable or fixed? Open or closed? It doesn’t matter which one is the one the bank is pushing that day. It matters what you need. Variable rate mortgages (these days) come with a lower price tag (and a smaller overall discount) than fixed rate mortgages, but with a higher amount of risk (that rates will go up). Generally, you can convert your variable rate into a fixed rate in at any time, but remember: the fixed rate available when you convert won’t be the same fixed rate you’re offered now.
Open mortgages have a much smaller discount than closed mortgages because the bank doesn’t want to give you a good price on a product that could walk out the door tomorrow. You’ll pay a higher price for the ability to move or pay out your mortgage any time during the term, so only choose one of these if you think the likelihood of doing either of those things is close to 100%.
6. Know who is allowed to give what discount.
If you’re at a bank, the person sitting across the desk from you has a predetermined discount amount on every single type of mortgage the bank offers. They can give you that maximum discount without getting permission from anyone else. This amount varies depending on what flavour of mortgage you choose, but is often in the range of 0.25%-0.5% on variable rate (closed) mortgages and 1.3%-1.5 % on fixed rate (closed) four or five year mortgages. The longer a term you choose, the higher the discount.
A bigger discount has to go through either their manager or a special back office team that is in charge of approving non-standard discounts. This is where your value as a customer works to your advantage if you’ve been a long-time customer and have other products with them. Make the case for the value of your business, including how credit worthy you are (this is why you need to know your own credit history).
7. Remember, if they’re giving to you with one hand, they’re taking something away with the other one.
Every lender has a couple of “branded” mortgages. Think the CIBC Wealth Builder® or the RBC Energy Saver™, two programs that add all sorts of other features to your mortgage. These are pre-packaged, pre-discounted mortgages that offer cash back, energy audits, or other benefits designed to give you the feeling that you’re getting a good deal.
Programs like these mean that not only will you pay a penalty to pay off or transfer out your mortgage before the end of the term, but you’ll also have to pay back all the other benefits you’ve received in the form of cold, hard cash.
Mortgage lenders only want one thing: your ongoing dollars, and they’re not in the business of giving those dollars away because they’re nice. Calculate the interest cost to the end of term on a no-frills mortgage, and then compare that number to the interest cost less cash back or benefits paid to the end of term on one of these branded mortgages. Take the time to do the math. It’s not terribly difficult.
8. Get it in writing.
Unless you’ve received the quoted rate in writing, the lender has zero obligation to give you that rate should their discount policy or posted rate change before you apply. Pay attention when they explain how long the quote is good for and under what conditions it can change. If they don’t tell you, ask. While you’re at it, get them to write that down too.
You’ll also want to have a written quote when you shop around so you can prove what you’ve been offered from other lenders. (You’re going to shop around, right?)
9. Shop around (and don’t let them pull your credit report)
This is the “Rinse and repeat” part. Take your credit report, income and expense information, and other written quotes with you when you visit all the banks and brokers you can. Tell them right up front that you want them to base their quote on the credit score you have in your hand, and that you don’t want them to pull your credit bureau report unless you decide to apply with them.
Why not pull your credit report multiple times? When a lender looks at your history and score, you look like you’re shopping for credit, and your score goes down. Not what you want when you ARE shopping for credit…since you have to shop around to find the cheapest credit going.
Yes, this is a long list. But really, is the time spent on getting familiar with your credit report and personal balance sheet wasted? Can finding a further 0.25% discount on the biggest purchase of your life be worth the time you spend talking to every lender you can find?
I leave you with a final number: $2,357. The amount of interest you’d save on a $200,000 mortgage by chopping 0.25% of interest off of a five year term.
Worth it? Anything you’d add?
(*UPDATED to add: Jason Hull at Hull Financial Planning goes on to expand on the value of shopping for a mortgage and how it can defeat your Monkey Brain.)