Working with a mortgage broker and providing a few more documents can open up so many options for you when you are selecting a mortgage. There is so much more to consider than just the rate. There are the prepayment privileges that allow you to make additional payments if you have some extra funds. There are some lenders with different perks such as a home warranty. Then there are the ways that penalties are calculated.
Current statistics show that roughly 6 out of 10 Canadians who sign a 5 year mortgage term will break it early. This could be due to a growing family, job transfer, marital breakup, health issues, there are potentially lots of reasons that it happens. When you break the term early, you are preventing your lender from earning the full interest that they were counting on as per your contract term. Therefore, there is a penalty to pay to leave it early. The banks and many credit unions have a complicated method of calculating their IRD (interest rate differential) penalty that on average equates to roughly 4.5% of your mortgage balance (on a 5 year fixed term). So on a $200,000 mortgage, this could mean a penalty of approximately $9000!!!
The mono-line lenders (lenders that are funded by the banks as well as other investors and all they do is mortgages) are much less punitive and typically the penalty is roughly 1.5%, or $3000 in our example. That is a huge difference and would dramatically decrease the amount of money you have left to use a down payment on your next home. So if you are the average Canadian and are going to end your 5 year term early, wouldn’t you want that $6000 in YOUR pocket???
A mortgage broker is not incented to sell any particular product, we are paid by the lender that funds your mortgage and our job is to understand your personal situation and find the best fit for you. For example if you tell me that you are very likely going to start a family in a couple of years or there is a chance that you might get a job transfer, then I am going to ensure that I find the best mortgage for you with the lowest penalty if you need to move. We might also look at shorter terms. I am also going to stay in touch with you afterwards to ensure that you have options presented to you should anything major change in your life. Do you think that the bank employee is going to call you to tell you that they may have found ways to save you more money on your mortgage?
Let’s face it, the people at the mortgage desk in the bank and the credit union are EMPLOYEES of that bank or credit union. They are paid to sell you on the bank’s product and try to earn the most money they can from your transaction, and possibly try to sign you up for others as well. They are not going to try to find ways to help you save money. They are not licensed and due to only knowing their own products, cannot offer you advice or choice on what makes the most sense for you personally.
So with just a little more work to gather some documents, you could be opening up the door to many more options and potentially saving yourself thousands of dollars later on! Please feel free to reach out to me if you are thinking of purchasing/refinancing/renewing a home in the future. It doesn’t cost you a cent to get a nonpartisan second opinion!!