A Bank of Canada paper released in March 2011 found that big banks in Canada offer discretionary pricing – discriminating between borrowers based on age, loyalty, income, market concentration and the customer’s own financial literacy. However, a slower economy has resulted in increased competition as banks fight for customers and market share. That is good news for borrowers as you will have slightly more bargaining power when you sit down to negotiate your mortgage.
You might feel uncomfortable negotiating with your bank, but rest assured that it’s not unusual. Statistics reveal that in the last 12 months, a growing number of Canadians have been negotiating lower than advertised rates. A 2010 survey by CAAMP and Maritz shows that while advertised rates averaged 5.65 per cent in 2010, Canadians who opted for a five year, fixed rate mortgage within that timeframe managed to secure an average rate of 4.23 per cent.
Art of negotiation
Bear in mind that while banks are eager for your business, they’re not desperate. You can’t just walk into your bank and demand a discounted rate. Negotiating is an art. To get a positive result, you have to realize that both sides want to gain something from the transaction. In this case, you want the lender to give you a good deal, while the lender wants you to take out a mortgage with their institution, rather than walk down the street to a competitor.
The key to negotiating with your lender is to focus on your terms. The conversation should centre on whether you are going to give the lender your business, rather than whether they are going to give you a loan.
Some preparation prior to discussing the mortgage with your lender is needed. Examine your own bargaining position, its advantages and limitations. Also, look at the lender’s position and what arguments might sway their hand.
Prior to the negotiation, determine exactly what your business is worth to the lender. You can do this by establishing how much you can afford
to borrow based on your current income, debt obligations and monthly expenditures. This is will give you an idea of how much you can expect a lender to offer you a mortgage.
You should also check your credit report – the better your credit rating, the more desirable you are as a customer.
Pay attention to what kind of rates are being offered by various lenders by following advertisements or ringing lenders direct. Several websites can help you compare rates as well. You’ll also need to make sure you are comparing apples with apples. There are many different products on the market and each has their own set of features and limitations. Find out what kind of loan most suits your borrowing appetite for risk and what loan qualities are most important to you.
Having this kind of information about your lender’s competitors will be helpful when you sit down at the table. Ask your lender why their loan doesn’t offer the same range of features, or interest rate as their competitor and why you should choose to take out a mortgage with them as opposed to going to the competitor. The lender might offer you a better deal as a result.
Up for negotiation
So what can you realistically expect the lender to move on? Here are a couple of areas that are always up for negotiation.
Your loan size and credit worthiness could make you a more valued customer to the bank and as such they may be keen to move the interest rate (or mortgage rate) lower in an effort to attract your business. Certain professionals as well as more attractive to banks, as they have reliable, well-paying jobs that make them less of a credit risk. Your industry group or union could even have a special deal with the lender that allows you to receive a discount.
Signing up for additional products – such as a credit card (which makes you a “stickier” client) could also be a valuable bargaining chip. Or offer to consolidate your assets (RRSPs, RESP, unregistered investments, etc) with them.
And lastly, if you have been a loyal customer with the lender, they may be more interested in keeping you as a client.
Once the lender has provided you with a list of fees associated with the mortgage, go through it carefully. Ask why each fee is being charged and whether there is room to move – most fixed and variable fees are negotiable if the lender is keen to close the deal. However, third-party fees, such as inspections, credit reports, appraisals and other services, are usually non-negotiable.
Now is also a good time to ask if you can get some free banking perks thrown in. You can even use the savings to pay down your mortgage faster!
The golden rule when it comes to negotiating your mortgage is to just ask, because no one is going to offer you a better deal unless you do.
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