Daryl French - Accredited Mortgage Professional
Jun 23, 2011 - 10:42:22 AM
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Today banks are doing a very good job of retaining their mortgage clients, in fact they are renewing in the area of 80 to 90% of the mortgages they hold. The problem here is the consumer is paying a price because more than half of these mortgages are being renewed at posted rates. What does this mean to the average consumer?
The posted rate today for a 5 year mortgage is 5.39%, but the discounted rate for a 5 year term today is about 3.89%, a difference of 1.5%. That doesn't seem like a big deal... unless you crunch the numbers! On a $200,000 mortgage amortized over 25 years that makes a difference of almost $14,000 in interest that you will pay over the next 5 years....ouch!
I don't know about you, but if I could save $14,000 I would be pretty happy. So how do you save this kind of money? I recommend you take your mortgage renewal to a mortgage broker and get them to review your mortgage. In fact, I think an annual mortgage review is a great service that many mortgage brokers offer today. Think about it, most people meet with their financial planner yearly to review that $50,000 RRSP, but those same people often have much more owing on their mortgage and leave it year after year, renewal after renewal really giving it very little time or thought?
A Mortgage Broker can advise you on not only the rates available, but often more important options as outlined below:
Should you take a fixed or variable product? There is no black or white, right or wrong answer as it depends on your individual risk tolerance and financial situation today and down the road. Maybe you should consider a Variable Rate at 2.5% with a fixed payment set at say 4%? You get some great savings today and even if the rates jump up down the road, you are paying higher interest on a much lower mortgage amount, often saving you a lot of money.
What term should you take? Over 3/4's of the mortgages in Canada are closed for 5 years or longer, meaning if you change or payout your mortgage prior to the end of term you pay a penalty. The average mortgage is only held for just over 3 years and more than 50% don't make it to renewal. So that means that more than half of the mortgage holders are paying a penalty at some point. So is a 5 year term the best idea or should you consider some other options?
Are all lenders penalties the same? Absolutely not, some calculate the penalties based off posted rates and some off discounted rates and this can change the amount you have to pay by thousands of dollars. The sad thing is that most people don't find this out until they are facing a situation where they have to pay the penalty and it is to late.
What is the best payment frequency? You can literally save thousands of dollars just by switching your mortgage from monthly payments to accelerated bi-weekly payments. For example if you were paying $1,000 per month and changed to $500 every 2 weeks, you would payoff your mortgage 3 years sooner, again saving you thousands.
So the lesson here is, speak to your mortgage broker and let them do what they do best and make sure you ask lots of questions because knowledge is power. If I can spend an hour going through my mortgage with a professional and save thousands, as a businessman that is a pretty good return on investment!
