How to Negotiate The Best Mortgage Contract In 2019By Lisa Rennie in Mortgage
Most Canadians who become homeowners typically need to take out a mortgage to help finance such a massive purchase. And as you may already be aware of, a lower rate on your mortgage is ideally what you want (or is it? learn more here). After all, the lower the interest rate, the more affordable the mortgage will be over the long haul.
But there are other terms of the mortgage that should also be negotiated and compared against other mortgage products. Like shopping for clothing, electronics, home furnishing, and other consumer goods, it’s in your best interest to shop around for the best mortgage product for your needs, and the best way to do that is to enlist the services of a professional to do all the legwork for you.
In addition to comparing different mortgage products, it’s also useful to negotiate with lenders to ensure the mortgage product you’re signing on for is as suitable as possible to your financial situation. Like a real estate contract, the terms of mortgages can also be negotiated. In fact, it’s recommended that buyers negotiate with their lenders when it comes to applying for a mortgage.
So, how exactly do you go about negotiating the best mortgage contract in 2019? The best way to do that is to understand the terms of your mortgage and understand what you need and want from your mortgage contract.
Let’s address the most notable feature of a mortgage: the interest rate. As we already mentioned, the lower the rate, the better. Even a fraction of a percentage point can translate into tens of thousands of extra dollars spent on interest over the life of the loan. As such, you’ll want to negotiate as low a rate as possible.
The mortgage rate refers to the amount that you’ll pay your lender for their services and the loan amount that you’re borrowing. Lenders usually charge higher interest rates for riskier borrowers (ie. those with low credits scores, low down payment amounts, and high debt-to-income (DTI) ratios), and lower rates for those who pose less of a perceived risk.
Is the interest on a Canadian tax deductible? learn here.
In addition to the actual interest rate charged, you’ll also want to be familiar with the types of interest rates that you can be charged, including the following:
A mortgage with a fixed-rate means that the interest rate will not change over the term of the home loan. That means your mortgage payments will remain the same month after month. This is often an attractive option for those who like the predictability of their mortgage payments, especially when it comes to sticking with a budget.
Fixed-rate mortgages are also attractive if rates are expected to rise in the near future. That way, borrowers are locked in at a lower rate and are not vulnerable to increases in interest rates.
As the name suggests, variable-rate mortgages are those with interest rates that can fluctuate over the term of the mortgage. Usually, these mortgages come with an introductory period whereby the rates are less than fixed-rate mortgages. That’s what makes them so attractive to borrowers.
However, the rates can change according to the market prime rate. If interest rates decrease, borrowers stand to save money. But if they increase, borrowers could be paying more than they would if they had chosen a fixed-rate mortgage.
With these types of mortgages, you can either choose fixed payments with a variable-rate, or adjustable payments with a variable-rate. The former simply means that the payments remain fixed, though a bigger portion of your payment will go towards interest if the rate increases (and vice versa). With the latter, the payments will fluctuate along with the prime rate, while a set amount will go towards the principal portion and the interest portion according to the current rates.
Take a look at this infographic to learn all about the cost of buying a house in Canada.
The mortgage term refers to the time frame within which the mortgage contract remains in effect. For instance, a 5-year term means that the current contract will remain in effect for five years. During this term, all the components of the contract will remain in effect as well, including the interest rate, fees, and policies.
The term can be as short as a few months or as long as a few years, a mortgage is made up of multiple terms and is something that can be negotiated with the lender. When the term ends, the borrower can decide to either renew the mortgage with the lender or switch lenders and mortgages. It should be noted that penalty fees may be in effect for switching lenders or for breaking the mortgage before the term ends.
There are also convertible terms that can be chosen, which allows borrowers to extend short terms into longer ones.
Can you pay off your mortgage early? Read this to find out.
While the term of the home loan refers to the amount of time that the mortgage contract remains in effect, the amortization period refers to the length of time that the borrower agrees to completely repay the full loan amount back to the lender. Again, this is another component that can be negotiated with lenders.
Long amortization periods. With a longer amortization period, it will take borrowers longer to pay off the mortgage. In addition, more money will be paid toward interest as a result of an extended repayment period. However, the monthly mortgage payments are much lower, making longer amortization periods more affordable.
Short amortization periods. A mortgage can be repaid in full much faster with a shorter amortization, with much less money paid toward interest, making this time frame cheaper in the long run. That said, mortgage payments are much higher as a result, which may not be a viable option for many borrowers.
In Canada, borrowers can extend their amortization period to 25 years for high-ratio mortgages or 35 years for conventional mortgages.
There are several types of mortgages that borrowers may choose from. It should be noted that different lenders may only have certain types of mortgage products available to offer. Also, some borrowers may not necessarily qualify for all types of mortgages.
Conventional mortgages. These involve a minimum down payment amount of 20% of the purchase price of the home.
High-ratio conventional mortgages. These allow for a minimum down payment amount of 5% of the home’s value, though they will require mortgage default insurance in order for the lender to hedge against the risk of the borrower defaulting.
While monthly mortgage payments are usually the more common payment frequencies that borrowers choose, there are others that may be available to them, including the following:
- Monthly – As already mentioned, monthly payments involve making one payment per month, for a total of 12 annual payments.
- Semi-monthly – These require two payments per month for a total of 24 annual payments.
- Bi-weekly – These involve one payment every two weeks for a total of 26 annual payments.
- Weekly – One payment is required per week for a total of 52 annual payments.
- Accelerated bi-weekly – One payment equal to 50% of the monthly payment is made once every two weeks.
- Accelerated weekly – One payment equal to 25% of the monthly payment is made once a week.
Do you know what the true cost of borrowing is? Click here to learn more.
Mortgage closing costs can vary depending on the size of your mortgage and can quickly add up to thousands of dollars. Although many of these fees may be fixed, lender fees are typically open to negotiation, including the following.
- Underwriting service fees
- Application fees
- Commitment fees
- Mail fees
Not only may you be able to negotiate these fees, but you should also pay close attention to any other unnecessary fees that you can avoid paying.
Ready to Apply For a Mortgage?
A mortgage is a crucial component to buying a home, but as expensive as it may be, you may be able to negotiate many components of it. Having said that, you’ll be in a much stronger negotiating position if you have a strong credit score, a good income, a low debt load, and a decent down payment.
To make things easier for you, consider enlisting the help of a mortgage broker who can help negotiate all terms of the mortgage for you. Let Loans Canada help guide you to the appropriate professionals who will be able to offer you mortgage products that suit your financial situation.