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.
Easy ways to keep more money in your pocket
It goes without saying that most of us would appreciate a little more money in our pockets. Believe it or not, its actually an achievable goal. In fact, a few simple tips can help you uncover meaningful savings each and every month. Need some ideas? Heres a little inspiration to get you started:
1. Pack food from home for lunches and snacks. Skip sandwich bags and opt for reusable containers, cutlery and drink bottle.
2. Switch light bulbs to CFLs. On average, it costs $250 a year in energy costs to light your home with incandescents. Save $150 by going with CFLs. Theyre more expensive initially, but will last 10 times longer.
3. Review and negotiate your service plansphone, internet, cable and television content.
4. Invest in topping up your insulation. Attic insulation can settle and compact over time, diminishing its original R-value and increasing heating/cooling costs. Topping it up with a quality batt insulation, like Roxul Comfortbatt, will immediately help improve the comfort of your home and reduce your monthly energy bills.
5. Pay off credit card debt and swap cards for lower interest rate options.
6. Install low-flow water fixtures to cut down on excess water consumption.
7. Lower your thermostat by two degrees in cold weather and increase it by two degrees in warmer weather.
8. Launder your clothes in cold water and at off-peak times.
9. Avoid impulse shopping. Stick to your list and avoid window shopping, which tends to draw buyers in.
10. Save money on entertainment by looking for free activities. For options in your area, try a simple internet search. You might be pleasantly surprised at the wide variety of activities and entertainment available for no or low cost.
Collectively employing the tips above could potentially add up to thousands in annual savings, proving that sometimes change can be a good thing.
Bank of Canada increases overnight rate target to 1 per cent
The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.
Recent economic data have been stronger than expected, supporting the Banks view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth. There has also been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies. The Bank continues to expect a moderation in the pace of economic growth in the second half of 2017, for the reasons described in the July Monetary Policy Report (MPR), but the level of GDP is now higher than the Bank had expected.
The global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices. However, significant geopolitical risks and uncertainties around international trade and fiscal policies remain, leading to a weaker US dollar against many major currencies. In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canadas economy.
While inflation remains below the 2 per cent target, it has evolved largely as expected in July. There has been a slight increase in both total CPI and the Banks core measures of inflation, consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack. Nonetheless, there remains some excess capacity in Canadas labour market, and wage and price pressures are still more subdued than historical relationships would suggest, as observed in some other advanced economies.