Know the ropes of renegotiating your mortgage
Thursday, Mar. 29, 2012
Mortgage renegotiation does not just mean cutting interest rates or payments, says Laura Parsons of BMO. Patricia Cancilla/Postmedia News Files
A middle manager for the federal government, Suzy, has a 7.6% mortgage on her $220,000 Ottawa condo. She pays $1,084 per month for interest and principal, a quarter of her $4,300 monthly take-home income. With a seven-year term, it has three more years to run — an albatross she would dearly love to shed. Especially when it looks like interest rates have bottomed and can only rise, she worries that her moment to save money may be passing her by.
“It’s a depressing amount and a huge burden,” says Suzy, who asked that her full name not be used. “I would like to renegotiate it, but I just don’t know the ropes. Even if I do, there might be a huge penalty between a new, lower rate and what I have to pay now. I haven’t had the courage to try negotiating it.”
There are solutions to Suzy’s dilemma. “There is some softness in the way the administration of penalties, typically three month’s interest at the existing rate, and sometimes a charge for paperwork. The clincher is that banks want clients,” says Caroline Nalbantoglu, a financial planner who heads CNal Financial Planning in Montreal. “If you go across the street to another bank and offer to throw in your other business such as RRSPs, the new bank may pay some or all of the penalties. It really depends on how much clout you can generate.”
The question — how much can one save on a mortgage renegotiation — breaks down into what components of an existing mortgage are flexible and which are cast in stone. Though lenders, including banks, credit unions and caisses populaires, may say that they can only go by the book, there really is no one set of rules, says Conrad Blais, president of Harmonie Hypothecaire, a mortgage broker in Laval, Que.
Not everything is negotiable. Penalties are written in stone and will not be waived, though lenders may juggle them and the potential discount to be had on a new, lower rate mortgage. The penalty will be paid, though the optics of the deal may conceal it, says Frank Napolitano, managing partner of Mortgage Brokers Ottawa.
“Refinancing will depend on the
institution and the mortgage,” Mr. Napolitano says. “For example, on an open-term mortgage, you may be able to lock in a different rate just by applying. There will not be a penalty. The mortgage may allow a 15% annual prepayment, which will cut the subsequent payments. You can reset payments to every two weeks. That can produce large savings with a 25-year amortization.”
Lenders say they are willing to adjust terms when a borrower wants to renegotiate. Laura Parsons, the Bank of Montreal’s Calgary-based area manager for mortgages for Alberta and the Prairies, says the bank can waive penalties by cutting the savings on rate reductions. “We examine each case to measure debt service. We never have paperwork fees, but we do say that they may a limit on how much a client can borrow.”
Mortgage renegotiation does not just mean cutting interest rates or payments. As Ms. Parsons notes, a borrower may want to increase payments to save total interest payable. “If you go from a 30-year amortization to 25 years, then you will pay $47.91 more per month per $100,000 and you will save $70,000 total interest.”
Bankers like to say that they don’t want to burden people with payments they can’t handle and, by the same token, they recognize that if income falls from illness or job loss, they need to make accommodations. However, getting stiffed by borrowers is not a major issue for Canadian lenders. As of December 2011, just 0.38% of all Canadian prime mortgages were 90 days or more in arrears, reports Toronto-based bond rating agency DBRS. The comparable U.S. figure, 5.1%, is down from a peak of 7% in 2010, it adds. Whether it is because Canadian banks don’t lend as capriciously as U.S. banks did leading up to the mortgage crisis of 2008 or because Canadians are just dutiful about their debts, the problem here is a faint shadow of the U.S. dilemma.
“Lenders don’t really have a default problem in Canada,” Mr. Napolitano says. “The bank’s risk in lending is constrained by the rising net worth of borrowers. That, in turn, is based on rising home values. In fact, home prices have risen faster than income. So even if a borrower’s income is up perhaps 8% over a few years, if the home has risen from $300,000 to $400,000, the lender is not really at more risk if it increases the loan by a third.”