What are the experts saying?

While there's no escaping the substantial rise in mortgage rates when it's time to renew your loan, there are strategies to benefit from a possible drop.

Shop around: Instead of automatically signing up for a 5-year fixed mortgage with one of the big banks, the experts suggest exploring other options. Being disloyal to your current financial institution, and considering other lenders may lead to better terms and savings.

Admittedly, shopping for a mortgage is right at the bottom of the list of most enjoyable summer activities. But taking the time could turn into thousands of dollars in savings in just a few years' time. 

Consider virtual lenders: The experts recommend working with so-called "virtual lenders'' instead of the big banks. Virtual lenders often have more favorable conditions, especially when it comes to calculating prepayment penalties. Their penalties for breaking a mortgage contract, in 90% of cases, is equivalent to three months' interest, whereas big banks use a more complex calculation called an “interest rate differential”. 

Inevitably, this creates a huge gap in penalties, especially when rates drop. Worse, many in the industry have trouble doing the big bank’s math to actually figure out what exactly is the penalty amount. Imagine the complexity for the average person who doesn't deal with this kind of thing every day!

Opt for shorter mortgage terms: Three-year mortgages are currently popular, despite having higher rates compared to five-year mortgages. Homeowners are betting on rates going down within the three-year period, and then benefiting from lower rates in the fourth and fifth years. This strategy aims to save money in the long run.

Some homeowners are even hopeful that rates will fall even faster. They hear talk of this impending recession, and believe that the Bank of Canada will lower its key interest rate. So they only sign up for a year or two "out of optimism”.

This is the first time in his nearly 20-years that this is happening. Historically, these very short terms were only chosen by people who expected to sell their property in the very near future. However, this strategy remains the exception. 

Consider insured mortgages: Insured mortgages involve paying a premium, but often offer lower interest rates. With an insured mortgage, the lender is protected in case the borrower defaults on payments. This reduced risk for the lender can result in more favorable interest rates.

Prioritize lower monthly payments: Given the rising cost of living, many homeowners focus on minimizing their monthly mortgage payments. This can be achieved through strategies such as opting for a lender that offers flexible payment options or choosing a longer amortization period.

Consider early repayment of principal: While not suitable for everyone, paying off the mortgage principal as quickly as possible can save on interest payments. This strategy can be particularly beneficial when mortgage rates are higher.

These strategies aim to help borrowers navigate the mortgage market, find better terms, and potentially save money. If you would like to known what your options are, call or email Fred and Martin Mortgages. We have access to the virtual lenders, and we happily shop your mortgage around in order to find a lender that best suit your needs. Best of all, it’s free, and could save you thousands. 

Fred and Martin