Mortgage shopping scenario

[dcaron]

Sorry for the newbie questions ...

Im about to engage into mortgage shopping, as Im approaching 120 days prior to my renewal (March 2013). This date is when I will hit the 5 year mark on my 7-year fixed term, and penalty will be 3 months interest (about $3500 rather than large IRD).

When I start to look around, does you recommend I deal with two brokers, and two banks, while letting them know Im shopping around for best rate+conditions? By doing this, will my good credit score be impacted?

The reason Im thinking about doing this is that my current employer is one of the banks I will consider, and offers a small rate rebate to staff. The other bank is where I have my mortgage + HELOC currently.

The banks Im considering are National Bank, CIBC.
The brokers are Multi-Pret Mortgages, and Dominion Lending Center.
Im based in Quebec.

Thanks for your comments!

(This is the article that got me thinking about this scenario ...) http://www.canadianmortgagetrends.co...verpaying.html

[dcaron]

Another question - What is the best option between:
#1 - My current bank is offering me a blended rate of 3.39% for 4 years fixed , for a mortgage of 262K (to compensate for a penalty of $3500)?
#2 - Another FI with a 2.99% 5f fixed for my balance of 265.5K (262k + 3.5K penalty)?

Quick calculations I did revealed that Im slightly better off with option #1 ...

[Cal]

You haven't really stated what your current rate is....making it difficult to determine how much you would be saving over the next 2 year period by choosing either option 1 or 2.

After that period, your choice really could depend upon where you think rates are going or will be.

[dcaron]

You haven't really stated what your current rate is....making it difficult to determine how much you would be saving over the next 2 year period by choosing either option 1 or 2.

My current rate is 5.22% on my 7-year fixed term. Payments are $878 every 2 weeks. Im looking forward to walking away at the 5 year mark in March 2013. Option #1 or #2 will produce a lower balance after only one year, if I maintain the same bi-weekly payments of $878 (base payment of $752 + pre-payment of +$126 for option #1 or base of $736 + $142 for option #2). After 4 years into option #2, I will have a $80 lower balance than with option #1, and a whopping interest saving of ~$18,000 than current term at 5.22%.

Five years into option #2 will generate even more drastic savings, if my current bank was to extend from 4y to 5y term at %3.39 blended rate. I believe they would lower the 3.39 blended rate for a 5y term though because they are offering a blended rate 4y term, based on a 2.99% rate + compensation for the 3 month penalty of about $3500 in March 2013.

[Just a Guy]

From my experience, having multiple brokers/bankers can cause issues. Each one will pull your credit score which will lower is a bit (this may be a concern depending on your credit score). Also, I've known some sales guys who have done this maliciously to ruin a credit score so the only person they could deal with was them...

Mortgage brokers say they shop all the same banks, and that if you look like you are "mortgage shopping", you won't get all the possible offers, but I've found both those statements to be untrue in a lot of cases. Remember, not all banks offer the same "fees" to the mortgage brokers, so they may be inspired to direct you towards a higher commissioned product.

I'd also suggest asking for all the options from 1-10 years, sometimes you find a deal you weren't expecting (I've had 7 year rates lower than 5 for example). Also, talk about the penalties, some banks will pay them out (or partially pay them) to get you to transfer.

Also, when you go to pay out your mortgage, ask them to deduct the one-time payment amount (usually 10-25% you are allowed to do annually) before they calculate the penalty (or get the new bank to issue you two cheques and paydown the mortgage first). That should save a couple hundred in penalties.

[dcaron]

What do you think about getting short term mortgages, while the economy is the way it is now. About 2 months ago, 1y term rates were close to 2%. This was better than any variable presently available. Does it make sense do subscribe to 1y as a replacement for a variable mortgage and re-evaluate the market 1y from now?

I wonder if there would be discharge fees at the end of each year? Perhaps staying with the same lender would prevent the fees. I imagine discharge fees to switch to a different lender, may reduce some fo the benefit of going 1 year at a time? Just curious how much that might add up to each year, and how you factor it in.

[Guigz]

Do you have any capacity for accelerated payments? What happens if rates rise 1%, 2%, 3%, 4%? If the answers to all these questions are "I will manage to pay my mortgage payment", then maybe you can consider taking the shorter terms. If you aren't sure, I don't think it's worth gambling your biggest asset (I presume).

There is no telling how fast the rates will go up if inflation picks up. Lookup the chart of the prime rate over time, you will see that the rates shoot up by 3-4% within a year in a few instances.

An alternative to this approach might be to split your pot and get an hybrid mortgage with different portions on different schedules (e.g., 50% of the mortgage on 5 year term, 25% on 2 year and 25% on 1 year term). You get to split the difference that way.

[dcaron]

I could handle all those rate raises. Would I be happy about them? The answer is no.

The flexibility with the short term is appealing though. This would allow me to make a move, sell, etc, every 1-2 years. Right now the 1y +2y fixed rates are the lowest of the bunch at 2.49%. Not sure how long they will stay that way. For 0.5% more, I can lock in for a 5y fixed, at a premium of $50/month over the 1y rate, which is not much...

The low penalty fees with a variable rate is also appealing (3 months interest versus IRD), but rates are bound to raise at one point, and when that happens, Im sure the banks will not make the fixed rates enticing to lock into.

I probably will go with 3y, 4y, or 5 y, portable/assumable mortgage, and make sure pre-payment options are decent. The fixed term rates are at their all time lows, so it cannot be a bad decision ...

[My Own Advisor]

If you're planning to stay in the home....5-year fixed with prepayment privledges would be good....
http://www.ratesupermarket.ca/best_m.../fixed_closed/

[Echo]

@dcaron - A one-year fixed term is definitely worth a look as a variable rate substitute. You'll probably have to pay your own switching costs if you move lenders and take a short mortgage. But you can lock-in your renewal rate after just 6 to 9 months, you don’t have to wait a year. You could get a one-year fixed now and then see if those big variable rate discounts return in a year. With rates this low across the board, it won't cost you much if you guess wrong.