With the buffet of mortgage options available today, it’s easy to contemplate a switch before your term is up. Variable-rate mortgage holders, in particular, might feel as though their feet are being put to the fire, as the Bank of Canada seeks to deal with runaway inflation with higher interest rates.
With every hike to the benchmark rate—and economists expect more to come in the remainder of 2022—variable-rate holders see the costs of their mortgage climb. They’re not alone: A number of people with fixed-rate mortgages are looking a renewal at some point this year, and the higher costs that await are enough to make any home owner reconsider their options.
If you’re thinking about shopping around for a cheaper mortgage, it’s important to read and understand the fine print before you make a move, or you could be surprised by fees and service changes that make your new and “better” home loan much less of a deal. Here are five important things to consider before you switch.
1. Watch out for fees
Leaving your current mortgage before the end of your term usually triggers a host of fees. Ask your existing lender for a list of all the costs you could be dinged with if you leave, and ask any new lenders you’re considering about fees that would apply to your new mortgage. Here’s a quick checklist:
- Interest penalty. If your mortgage isn’t up for renewal or isn’t in an open term, your existing bank will likely charge an interest penalty for you to switch. That usually amounts to three months worth of interest payments, or the difference between the interest rate on your current mortgage and your lender’s current rate for the amount of time that’s left in your mortgage term. (The latter is called the interest rate differential, or IRD.) To entice you to make the switch, your new prospective lender may offer “switch incentive” funds you can use to offset interest penalties, so ask if that’s an option when you’re shopping new lenders. Keep in mind, though, that adding an interest penalty to your new mortgage balance means paying interest on that interest penalty, while paying penalties from your savings equates to losing the potential return you’d earn on that amount. A financial planner can help you factor in all these details and calculate whether you’ll lose or gain overall by paying an interest penalty to get out of your mortgage. It’s rarely worth paying the penalty unless your existing rate is much higher than the new rate you’re being offered.
- Appraisal. Ask your new lender to cover the cost of having your property’s value assessed.
- Legal or title fees. Mortgages require legal paperwork, and lenders hire companies to do it for them, but it’s you who may pay for it. There are different kinds of legal mortgages, each with its own fee. Know what kind of mortgage you currently have (usually a conventional first charge or a collateral charge), so you’re quoted accurately for legal fees and you can negotiate if you think the fees are off.
- Discharge Fee. This is an administrative legal service fee from the lender you’re leaving to remove their lien (mortgage charge) against your property. Ashley Mandaric, an RBC mortgage specialist for 10 years, confirms, “Every bank or lender charges a discharge service fee. Find out how much your current lender charges and ask up front if that’s covered by the new lender.”
- Property tax administration fee. Some lenders charge service fees to administer payment of your property taxes through them. To avoid this fee on your new mortgage, ask to pay property taxes on your own.
- Temporary renewal costs. During the switch process, you will likely have to sign a temporary renewal with your existing bank for an open term and even pay a new payment amount once or twice until all the legal and financial paperwork for your new mortgage is completed. Sometimes, glitches occur. Home owner Mike Schmidt of Victoria, B.C., can attest to this. “I had a $45 [non-sufficient funds] fee due to my old lender trying to take out a larger payment than usual without advance warning,” Schmidt recalls. “The new bank finally paid off my original mortgage nine days after the maturity date. I calculated this as costing me an additional $13 per day, versus my old daily interest amount on the previous mortgage.”
2. Don’t pay more for your banking services
Sometimes financial institutions offer mortgage rate deals if you move some or all of your other banking products to them. Compare all the fees and rates on every product included before you agree to do so. Negotiate the best deal for each account and don’t switch anything that’s not to your benefit.
3. Don’t sacrifice customer service
We all want to feel respected for our time and business, so warm and friendly employees who know their stuff and return your messages promptly can be the deciding factor among multiple lenders offering the same rate. Mortgage specialist Mandaric, for example, gives potential clients her cell number and swiftly returns calls or texts, sometimes even during non-business hours. If you’re not getting great service during initial interactions, it’s unlikely a lender’s service will improve once they have your business.
4. Changes to your finances or health could impact your qualifications
Life happens. If changes, like having a baby, divorce or switching jobs, have occurred, your income or debt load may be impacted, affecting your ability to qualify for a mortgage. So it’s important to investigate your options, if you’re thinking about switching.
“Consumers may no longer fit in traditional lending spaces if their circumstances have changed,” advises Samantha Brookes, CEO of Mortgages Canada. “A gap in employment, income, debt load, credit history or property value can affect qualifications.” In other words: Your personal circumstances may not allow you to snag that same discounted rate your neighbour’s been bragging about. Be honest in your application, and a good lender will do everything they can to help you qualify.