Got a small mortgage balance owing? Why you'll likely get a lousy rate.
Special to The Globe and Mail -PublishedSunday, Nov. 22, 2015 5:45PM EST -Last updatedMonday, Nov. 23, 2015 8:12AM EST
Picture this: You spend 15 or 20 years slaving to pay down your mortgage. Youve built up 80 per cent equity in your home and you have just five years left until its free and clear.
After all that effort, after all that built-up equity, you deserve the lowest mortgage rate around, right?
Perhaps, but thats not how it works in our mortgage market. The people rewarded with the lowest rates are the ones with big, fat six-figure mortgages, and there are two main reasons for it. The first one wont surprise you, but the second one might.
The No. 1 reason that lenders covet monster loans is profit. If youve got a giant mortgage, banks and credit unions figure youll have more assets to invest with them, more savings to rot in their 1-per-cent savings accounts, more purchases to put on their credit cards and credit lines, more appetite for insurance and so on.
Thats why its easier to grind down a banks mortgage specialist on a $700,000 loan than one for $70,000. (One exception is when you have a small mortgage, plus a large amount of non-mortgage business with that lender, and you threaten to leave them.)
Brokers are the same way. They earn commissions just like bankers. And the bigger the mortgage, the bigger the commission.
Thats why some of the best deals on rate-comparison websites say things such as: For mortgages of $300,000 or more. Mortgage minimums are becoming more and more common.
For most brokers, one $300,000 mortgage is better than doing six for $50,000. Of course, six $50,000 clients means six potential referral sources instead of one. But it also means exerting six times the effort to close those mortgages, and time is a scarce resource for brokers.
The second reason small-time borrowers do worse in the rate department is risk. Its one of the most counterintuitive things in the mortgage industry, but someone with a puny 5-per-cent down payment often gets a better rate than someone whos been pounding down his or her mortgage for decades.
Thats crazy, you may say. Isnt my mortgage less risky if I have a huge amount of home equity?
Technically, yes. But if youre dealing with a lender who sells mortgages to investors, thats not always reality. Mortgage investors prefer the safety of insured mortgages. Those are mortgages where an insurer, backed by the Government of Canada, guarantees to pay off the balance if the borrower defaults.
Theres a cost for this insurance, and when the mortgage is less than 80 per cent of the property value, the lender must typically cough up this fee. By comparison, when the loan-to-value ratio is more than 80 per cent, it is the borrower who pays that insurance premium. For lenders who sell their mortgages to investors, avoiding the cost of insurance lets them offer slightly lower rates usually about one-tenth of a percentage point lower.
Quick tip: If youre renewing a mortgage that you paid to insure, youve built up 20 per cent equity or more and youre switching lenders, provide your insurance policy number to your new lender or broker. Keeping your default insurance in force costs you nothing and gives you a wider selection of lenders and rates when you renew the next time.
So, where can diligent borrowers go for a deal on a mini-mortgage? Most people just renew with their existing lender. Saving one-tenth of a per cent interest on a $50,000 mortgage with a five-year term and amortization is only about $130. Unless you need to refinance or add a secured line of credit, the trivial savings dont offset the hassle of reapplying elsewhere, collecting your documentation, getting your home appraised (which you must often pay for), meeting with a lawyer or closing agent, paying your lenders discharge fee and so on.
None of this should stop you from trying to better your rate. At the very least, use competitors rate quotes as a bargaining chip, either with your existing lender or with a broker who doesnt have a mortgage minimum. And if you have loads of other business with your bank or credit union, definitely use that as leverage. There are always other lenders who would welcome all of your banking business with open arms.
Canadian home sales fall further in July
According to statistics released today by The Canadian Real Estate Association (CREA), national home sales declined further in July 2017. Highlights:
National home sales fell 2.1% from June to July.
Actual (not seasonally adjusted) activity in July stood 11.9% below last Julys level.
The number of newly listed homes edged back by 1.8% from June to July.
The MLS Home Price Index (HPI) was up 12.9% year-over-year (y-o-y) in July 2017.
The national average sale price edged down by 0.3% y-o-y in July.
Julys interest rate hike may have motivated some homebuyers with pre-approved mortgages to make an offer, said CREA President Andrew Peck. Even so, sales activity continued to soften in the Greater Golden Horseshoe region. Meanwhile, sales and prices in Montreal continue to strengthen. All real estate is local, and REALTORS remain your best source for information about sales and listings where you live or might like to.
July marked the smallest monthly decline in Greater Golden Horseshoe home sales since Ontarios Fair Housing Plan was announced in April, said Gregory Klump, CREAs Chief Economist. This suggests sales may be starting to bottom out amid stabilizing housing market sentiment. Time will tell whether thats indeed the case once the transitory boost by buyers with pre-approved mortgages fades.
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Decline in single-family component moderated by gain in multi-family dwellings
Canadian municipalities issued $8.1 billion worth of building permits in June, up 2.5% from May and the second highest value on record. Higher construction intentions for multi-family dwellings and commercial buildings were mainly responsible for the national increase. All building components reported gains in June, except for single-family dwellings.
The value of residential building permits fell 0.9% in June to $5.0 billion, the fourth decrease in five months. The decline was mainly the result of lower construction intentions in four provinces, notably Ontario.
In June, the value of permits for single-family dwellings decreased 12.5% to $2.4 billion. Seven provinces registered declines, with Ontario being the main contributor to the decrease.
Conversely, construction intentions for multi-family dwellings rose 12.5% in June to $2.7 billion, marking a third consecutive monthly increase. Seven provinces registered gains, led by Ontario and British Columbia.
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