# mortgage renewal advice



## jazzman (Dec 15, 2014)

Hi everyone, 

In March, my 5 year term ended with 1 of the big banks and i moved to Coast Capital. I signed a 3.45 5 year fixed. But now, the rates have dropped to 2.990 for 5 year fixed.

I am looking for advice on how to ask my current bank to refinance my mortgage:

1) Based on my calculation, I will save $5000+ with the 3.49 > 2.990 switch. Coast Capital has told me the penalty will be 90-Day Interest Penalty which comes out to $2,200

2) Would Coast Capital be inclined to even help me if it means they lose money? Should I look at other banks?

I am new to this so your advice is appreciated.

Thanks


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## Just a Guy (Mar 27, 2012)

There is no way a bank loses money on a mortgage. Banks are leveraged, they lend out 10-15x what they have in assets. They pay you maybe .5% in interest, then get you to pay 2.99% leveraged at say 10-1, so an effective rate of 29.9%. They aren’t losing money, mortgages are cash cows.


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## birdman (Feb 12, 2013)

Not quite right on the banks return of 29.9%. Firstly, from a maturity perspective the banks assets (loans) are "matched" off against their liabilities (deposits). This is done to manage interest rate risk. In other words a 5 year mortgage is matched off against a 5 year term deposit. In this case, its a 2.99% mortgage which would be funded by a 5 year term deposit at lets say 2%. Therefore, they make .99% on this mortgage. Demand loans are funded by demand deposits so say a loan at Prime +2% would yield the bank 4.95% and the average cost of deposits (demand and shorter dd term deposits) would be say 1% and the net return to the bank would be 3.95%. Credit cards are a different story but then again, the overhead and losses are lots higher. The issue is not quite as simple as the above as "average duration" (the average duration of a 5 yr mortgage is I believe about 4 yrs) comes into play. To manage the difference in maturity dates between loans and deposits the banks use derivatives including interest rate swaps and interest rate futures. Quite a complex area and more than I can go into here but the matter is included in the notes to the Banks annual financial statements.
In regards to leveraged 10 to 1 I assume you are referring to lending out 10 times their equity? Just remember that their assets (loans, investments, property,etc) have to equal their liabilities (equity, deposits, bonds, payables) etc.
The Royal Banks net interest margin for last year was 1.69%. Here is the link comparing the net interest margin for Cdn Banks:
https://www.gurufocus.com/term/NetI...%2B%2528Bank%2BOnly%2529/Royal+Bank+of+Canada
Of course the Banks have lots of other sources of income besides their net Interest income and include service charges and foreign exchange, income from subsidiaries (brokerage, insurance, mutual funds, etc). Income from subsidiaries I believe account for about 50% of the Banks net income.


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## birdman (Feb 12, 2013)

Suggest you read your mtge. I thought the norm was the greater of the interest rate differential or 6 mos interest penalty but not sure. I doubt the F/I would want to lose money on the deal and and if you transfer to another F/I you will still be subject to paying the interest penalty and then you will have a bunch of other fees, mainly legal and perhaps appraisal. My best guess is you are stuck with your current rate but may be able to buy it down to the current rate. Theoretically it should make no difference. I'm certainly not an expert on the subject.


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## ian (Jun 18, 2016)

Shop it around. Perhaps a compromise. Pay the $2200 but get the rate dropped by 1/8 or so.

If you stay with them, certainly do not pay a mortgage renewal fee. That is mask and gun time for the financial institution. We always had it waived when we pushed back. Same with the appraisal fee. Just say no...and mean it.


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## Just a Guy (Mar 27, 2012)

Frase,

You need to read up on fractional reserve banking...

https://www.investopedia.com/articles/investing/022416/why-banks-dont-need-your-money-make-loans.asp

It’s regulated, but it’s usually at least 10x assets.


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## Spudd (Oct 11, 2011)

I did this a few times with TD, they always did it no questions asked. As long as you pay the penalty they don't care. 

Just make sure you know exactly how much the penalty is and how much you will save over the term of the mortgage before you pull the trigger.


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## twa2w (Mar 5, 2016)

You are mistaking reserve requirements with deposits. Reserve requirements are not the same thing as deposits.
Reserves are not an asset but a liability. Reserves are only a portion of deposits that must be kept liquid.

Read any Canadian banks financial statement. They don't make the gobs of money on mortgages that you think they do. 
You know the old 80/20 rule, it is true in banking as well. About 11% of mortgages make most of the money in the mortgage book. ( RBC figure from about 10 years ago). The reason the banks lend on mortgages that don't make much money is that a mortgage is an anchor product and money is made on mortgage life insurance, lines of credit, accounts etc that come with it. The banks also sell large portions of their mortgage book and make money servicing those mortgages for the purchasers.


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## birdman (Feb 12, 2013)

you got it twa2w. As I mentioned in my above post the Royal Banks net interest margin for fiscal 2018 was 1.69% for their entire book of business. They probably make about 1% on conventional mortgages, 3-4% on well secured personal and commercial loans, and of course high rates on credit cards etc. Overall, its a low margin business but the financial margin now represents less than 50% of their income. Service charges, fee income, mutual funds, brokerage, foreign operations are the other sources of income that come to mind.


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## Pluto (Sep 12, 2013)

Go to a mortgage broker and see what offers you get. I did a very similiar thing as you are facing and got an offer with "cash back" which covered most of the penalty for getting out of the first mortgage. 
Seriously consider a variable rate. Against conventional wisdom, I came out way ahead with a variable rate over 15 years.


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## Mortgage u/w (Feb 6, 2014)

jazzman said:


> Hi everyone,
> 
> In March, my 5 year term ended with 1 of the big banks and i moved to Coast Capital. I signed a 3.45 5 year fixed. But now, the rates have dropped to 2.990 for 5 year fixed.
> 
> ...


This is exactly the reason I advise people to stick with variable. As much as the media keeps influencing you that rates can only go in one direction - we keep ignoring that there are always 2 directions no matter what the ecomony experts predict.

Sorry to get off topic. To answer your question, if your savings outweighs your penalty, it may be worth the switch. However, that's assuming you make it through the next 5 years without breaking the mortgage again. What will you do if halfway through the rates drop to 2.49%?


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