Mortgage: sign now, save later

If you can’t escape the substantial rise in mortgage rates when renewing your loan, there are strategies to take advantage of a possible drop.

The first is to shop around, rather than agreeing to sign for a big bank’s “5-year fixed term” without thinking too much. Mortgage brokers will tell you that you can find better than this option, which was the default for decades. So don’t hesitate to be unfaithful to your financial institution and put aside your old reflexes.

Admittedly, shopping for a mortgage is right at the bottom of the list of the most enjoyable summer activities, along with meticulous cleaning of the shed. But the exercise could turn into thousands of dollars in savings, in a few years.

What is the strategy of the experts?

Like her colleagues, she advocates contracts with low penalties for breach.

Thus, in the event of a drop in mortgage rates in two or three years, for example, it may be advantageous to terminate the contract before the expiry date and sign a new one.

The big banks that everyone knows, the well-established ones, are at a disadvantage in this search for a “flexible” lender. Because their way of calculating the penalty harms consumers.

“I wouldn’t do 5-year fixed with traditional banks,” says Philippe Béland, who has his own brokerage firm affiliated with Consortium Hypothécaire. He also prefers so-called “virtual” lenders.

Generally, the penalty is equal to three months’ interest or the “interest rate differential”, whichever formula gives the greater amount. To do the calculation, the major Canadian banks use the rate posted at the time the mortgage loan is taken out, while non-bank (virtual) lenders use the interest rate written in the contract, which is normally lower after negotiations.

Inevitably, this creates a huge gap in the penalties, especially when the rates go down a lot. In addition, the banks’ way of doing things complicates decision-making. “Even we are not able to do the calculation, because we do not know the posted rate,” says mortgage broker and co-founder of apoint Mortgage, Simon Lupien. Imagine then the complexity for ordinary mortals who do not bathe in it every day!

Virtual lenders’ 5-year fixed terms – which are not riskier, contrary to what their name might suggest – are generally the preferred option for younger, less wealthy first-time buyers. They seek stability, predictability, and the smallest payout possible. We understand them, given the circumstances.

Another strategy is to choose a shorter term than the traditional five years.

Three-year mortgages are also very popular at the moment, even if the rate is higher than that of five-year mortgages. It’s a bet. Owners are betting on the fact that after paying “surplus” interest during these three years, they can then benefit from a fairly low rate, during the fourth and fifth year, to compensate. And that, all things considered, they will have saved.

Some owners are even hopeful that rates will fall even faster. They hear about an impending recession and believe that the Bank of Canada will then lower the key rate. They therefore only sign for a year or two “by optimization”, reports Philippe Béland.

This is the first time in his nearly 18-year career that the broker has observed such behavior. Historically, these very short deadlines were only chosen by people who expected to sell their property very quickly. However, this strategy remains the exception, according to other brokers who prefer, by far, a term of at least three years. Which is still short.

At nesto, a Montreal-based mortgage lender that first made a name for itself for its brokerage activities, we are seeing a sudden upsurge in interest in five-year terms, regardless of the age of the clients. Quite simply because this rate is now the lowest. This was not the case until recently. With the rising cost of living, household budgets are stretched to the limit and all that matters is having the lowest possible monthly payments, explains Damien Charbonneau, co-founder and chief operating officer.

For this same reason, mortgages that allow for large prepayments, up to 20% per year, for example, are not particularly sought after.

But Simon Lupien says he sees customers postponing their renovation or change of vehicle project to reduce the capital due on their property.

Véronique Caron observes it especially among her clientele in their fifties who no longer want to have a mortgage once they retire.

If the idea of ​​repaying your loan as soon as possible was unattractive when rates were at 2%, it makes more sense now that they are hovering around 5%. Those planning an inheritance, a pay rise, or the end of their car payments should favor a flexible lender on payments.

Early repayment of capital is not within everyone’s reach, but it is a strategy that certainly saves on interest.