In today’s market, it completely amazes me how many people shop endlessly for their mortgage during their first purchase, but simply accept the bank's first offer when renewing their mortgage. As a former marketer for a major bank, let me reassure you, that first offer is almost definitely not their best offer. Even today, most banks start renewal offers at posted rates.
The simple fact of renewals is this: nearly 60 per cent of people sign back renewal letters without even taking the time to see what else is available. As a result, there is little or no incentive for the financial institution to give their best offer.
What makes things even more interesting is the fact that renewal letters usually only arrive about two to three weeks before the mortgage is actually up for renewal. This period gives you very little time to arrange financing with another lender or to take advantage of the lower rates that may have occurred in the three to four months before your renewal date.
Consumers should be pre-approving their renewals 90-120 days with other institutions prior to their actual renewal date. This immediately gives you the benefit of the lowest rate on the market for the longest period possible before your renewal date. What makes this better is the fact that this is completely free and without obligation.
When a borrower first starts to pay off their mortgage, the majority of the blended principal and interest payment goes straight towards interest. As time goes by, the interest portion of your payment becomes smaller while the principal portion becomes larger.
This blended payment has important implications to the mortgage borrower. If you took out a $350,000 five-year fixed mortgage at 3.79 per cent today (based on a 25 year amortization), your total outstanding mortgage balance would still be $315,325.
At the end of that first five year period – you only paid off less than 10 per cent of the original balance! Do you think a $315,325 mortgage loan is worth shopping around for?
Before your current mortgage holder sends you anything, shop the market. Below is a list of the documentation you will require at renewal time.
1. Ask your employer to prepare a letter on company letterhead outlining your name, base salary (or hourly rate), normal hours worked per week, position and length of service.
2. If commission sales or self-employed, three years personal tax returns together with the Notice of Assessments from Canada Revenue Agency.
3. Complete a standard mortgage application.
4. Find your Mortgage/Charge on Land and get your most recent property tax receipt.
A mortgage is too big a financial decision to not take seriously. Place your mortgage with the institution that gives you the best combination of features, rates, and service. If your current mortgage holder really wanted your business, wouldn’t they have given you a competitive rate right from the start?
In today’s market, discounts of over 1 per cent off posted rates (which is what is often what is sent out with renewal offers). On the $315,325 example above, this could save you over $3,000 per year in after-tax cash flow.
Always remember that a qualified borrower can demand the best – and working with the top mortgage people can have their education and resources save you a lot of money.