It’s no news that mortgage rates are on the rise in Canada. After several years of rock-bottom interest rates and “easy” credit, home buyers are back to fretting about the increasing costs of homeownership. While there’s not much you can do to avoid a mortgage loan (if you are one of us “average people”), there are options to keep your mortgage rate as competitively low as possible.
Mortgage-rate shopping can save you tens of thousands of dollars in interest payments over the life of your mortgage loan. This is “extra” money that can go towards:
- Paying off your mortgage faster
- Paying off other debt
- Investing for your retirement
- Paying off your kid’s college tuition or funding their RESP
- Splurging like there’s no tomorrow, and more.
Shopping For The Best Mortgage Rates
You would probably be surprised at the number of Canadians who default to their traditional bank when they are looking to get a mortgage. It’s like driving on autopilot…as an experienced driver, you do not need to actively think about stepping on the gas or stomping on the brakes when you want to bring your vehicle to a stop. You just do it – without much thought.
This is what I think happens when people simply go to their bank, apply for a mortgage, take the rate they are offered and forget to shop around for better rates. Like savings account rates, expensive monthly chequing fees, and high Management Expense Ratios on mutual funds, your traditional bank does not usually offer the best deals possible.
I sort of realized this when I went rate shopping a few years ago and obtained a mortgage rate that was 0.45% lower than what my long-time bank was offering me. The better rate had similar terms and was offered by a credit union I had never had any dealings with before!
The moral of this story is that: loyalty to your bank is good, but rate-shopping can save you a ton of money.
It’s easy to shop around for better rates without leaving the comfort of your home when using online-mortgage comparison websites. They give you access to multiple lenders at once, potentially saving you lots of time that would be required to approach each lender individually.
Some online mortgage comparison sites you could use to compare rates include:
Comparing rates is free, and mortgage brokers are generally compensated for their service by the lender. So, for you, this free service can be a huge win.
How Much Can You Save With a Lower Mortgage Rate?
Before going into how much you can save in real cash by obtaining a lower mortgage rate, let us first look at a sample of rates available on the market today. Here’s a snapshot of what I found for a $400,000 5-year fixed mortgage in Manitoba on May 2, 2018:
- CanWise Financial: 3.09%
- Mogo Mortgage: 3.14%
- First National: 3.34%
- HSBC: 3.22%
- Tangerine: 3.59%
- Scotiabank: 3.74%
- RBC: 3.74%
- Simplii: 4.79%
- CIBC: 4.89%
- TD Bank: 5.59%
As you can see, the mortgage rates on offer are all over the map. The lowest rate I could find using a couple rate comparison websites was 3.09% and the highest was 5.59%. That’s a whopping difference of 2.50% in annual interest rates!
Note that terms and conditions of different mortgage rates and lenders may differ. Before choosing a rate and applying for it, always look at the small print including rate lock-in periods, prepayment privileges, pre-approval, portability, etc.
So, again, how much can you save with a lower mortgage rate? Let’s look at some numbers:
For the sake of simplicity, say we compare potential savings from obtaining a mortgage rate of 3.09% vs. 3.59% (a difference of 0.50%) on a $400,000 mortgage loan. Results show that:
- Monthly payment amount (@ 3.09%): $1,911.50
- Monthly payment amount (@ 3.59%): $2,016.13
- Difference in monthly payments: $(2,016.13 – $1,911.50)= $104.63
- Monthly savings: $104.63
- Annual savings: $1,255.56
- Savings over 5-year term: $6,277.80
- Mortgage balance after 5 years: $342,488
Following from scenario 1, let us assume you put down your annual savings of $1,255.56 towards your mortgage principal as a lump-sum payment:
- Monthly payment amount (@3.09%): $1,911.50
- Annual lump-sum payment: $1,255.56
- Total interest savings on a 25-year amortization: $13,851
- Amortization period: reduced by almost 2 years to 23.1 years. That is almost 2 years of interest and principal saved.
- Mortgage balance after 5 years: $335,807
How about if you choose to just increase your monthly payments by your monthly savings of $104.63 instead of waiting till the end of the year before putting our money to work?
- Interest savings: $14,440
- Amortization period shortened by almost 2 years
- Mortgage balance after 5 years: $335,712
What happens if you choose to invest your monthly mortgage payment “savings” in the financial market and earn say 5%?
- After 5 years: your investment would have grown to $7,131.30
- After 25 years: your investment would have grown to $62,051.81
How would an additional $62K look in your retirement pot? Great, eh?
In addition to shopping around for the best mortgage rates for your circumstances, other strategies to lower your mortgage burden in the long-term include:
- Buy a home you can afford
- Increase your payments e.g. through accelerated and lump-sum payments
- Choose a variable rate over a fixed rate mortgage if your finances can withstand the risk of unexpected changes in interest rates
- Save for a substantial down payment (20% or more). This will also save you thousands of dollars in CMHC insurance.
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