Drivers are willing to take detours to save a few cents on each litre of gas. Travellers spend hours online to find a slightly cheaper plane ticket. But when it comes to mortgages, shopping around isn’t systematic. In Quebec, 45% of homeowners didn’t compare rates offered on the market before committing.
In other words, they accepted the proposal of a single lender, usually their bank, without checking whether there were better offers on the market. This is not unique to Quebec, 43% of Canadian homeowners have done the same thing, reveals a recent Léger survey for the site EveryRate.ca which allows you to compare the rates of the main lenders.
Signing without doing your homework is “a big mistake,” because there are “huge differences” between financial institutions, sometimes as high as 1%, according to mortgage broker and co-founder of the new website Andy Hill. That’s an extreme case, he admits. Typically, the difference is more like 0.3% to 0.5%, decimals that may seem small at first. But over 25 years, the hundreds or even thousands of dollars saved each year will surely add up to a significant amount.
On a $500,000 loan, a 0.45% difference translates into a savings of $126 per month, or $7,560 after five years. This amount does not take into account the compound interest that could be generated by this saving.
On Ratehub, another rate comparison site, a gap of 0.8% currently separates the most expensive lender from the cheapest for a five-year closed term. On EveryRate: 0.55%.
Those who hate shopping, calling, waiting in line, negotiating, calling back and haggling again have the option of delegating the work to a mortgage broker. At a time when economists are predicting a series of rate cuts, this avenue seems particularly wise for anyone who wants to take advantage of it. Because there are various strategies, each with its advantages and disadvantages.
At nesto, a Montreal online lender, we see that customers want to take advantage of expected rate cuts. However, variable rates, which seem to be the perfect tool for this, are much more expensive than fixed rates, which already anticipate, to a certain extent, possible rate cuts. The gap is 0.81% for insured loans.
The company has therefore come up with a solution that it describes as unique in the market. For six months, the rate is fixed (at the price of the five-year term, or 4.3%) and then the customer decides whether to continue with the fixed rate of the moment, for three or five years, or a variable rate. “This gives the benefit of postponing the decision for six months because everyone would like a crystal ball, but no one has one,” says the co-founder and COO, Damien Charbonneau: No less than 40% of customers choose this option.
Broker Véronique Caron of Multi-prêts empruntes believes that the best strategy “depends on where you are with your mortgage.” A retired couple who only owes $100,000 will want stable payments and a closed five-year term, even if they hope rates will drop. The same goes for homeowners who want peace of mind and a predictable payment after being burned by all those stories of people panicking because their payments were climbing at the same time as the prime rate.
With the explosion in home prices, the broker adds, the fixed rate is the only way for some new buyers to qualify since the test is done by adding 2% to the rate on the contract. “The variable is at 5.5%, so I have to qualify at 7.5%. For the fixed, I qualify lower, at 6.5%.” Colloquially called a “stress test,” the exercise makes it possible to verify that the owner’s budget will be able to withstand an increase in interest rates.
However, owners “traumatized” by the variable rate have no interest in opting for a short term of one to three years, a strategy that was particularly popular in the summer of 2023.
Today, these terms are too expensive. They cost about 2% more than the five-year fixed rate. It is therefore not a “logical” decision, even if we are convinced that the key rate will plummet, calculates Damien Charbonneau. In any case, he says, “for most people, 4.3% for five years is very reasonable.” This option is also generating significant enthusiasm.
Beyond the rate, it is wise to choose a lender whose penalties in the event of a breach of contract are as low as possible. If rates drop significantly, it could then become advantageous to restructure the mortgage loan to benefit from them. Véronique Caron points out that “virtual banks clearly offer the lowest penalties in the industry.” However, it is difficult to calculate the average difference, because there are too many variations depending on the scenarios.
Within two years, nearly half of Canada’s mortgages (2.2 million) will need to be renewed. This will certainly continue to stimulate the search for strategies to deal with the changing reality, both on the part of brokers and lenders. We might as well organize ourselves to take advantage of it.