What to look out for when renegotiating a mortgage

Renegotiating a mortgage can be like ending a bad marriage: Both can be painstaking processes, but can leave you facing a more stable future.

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And, much like reassessing a personal relationship, you have to determine when and whether to stick with your lending institution, or move on to another relationship.

Whether you’re a home, condo, townhouse or other property owner, timing the refinancing of a mortgage is everything – and key to deciding which bank, mortgage company or other lending institution to sign with and under what terms.

Take Ryan Henderson, whose recent remortgaging efforts focused on the condo he and his wife, lawyer Gia Ghassemi, own and rent out in downtown Toronto.

Although an investment manager with Edward Jones, Mr. Henderson said he and his wife still wanted help when their mortgage came due last month – partly because they also had to consider the payments they are making on their own home and primary residence – so they turned to independent mortgage agent David Larock because he deals with a variety of lenders.

“We had previously locked in in 2009 at what we thought was a great rate of 3.35 per cent for five years,” for the condo, says Mr. Henderson, 36. “Our renewal notice came in, and while the posted rate was still very good, our mortgage broker was able to shop it around.

“We did check with the big banks as well as our existing lender, however, their rates were not as competitive” as the mortgage company he and his wife eventually settled on – First National Financial LP.

“We ended up with an even better rate of 2.84 per cent fixed for five years,” with a 25-year amortization (the time it would take to pay off the mortgage). But while rates are important,” Mr. Henderson adds, “we considered other factors: online access; a great customer service department so far; and a little more wiggle room on things like additional payments.”

Historic low rates drive refinancing

With historically low mortgage rates in recent years – driven by the Bank of Canada’s key overnight interest rate, which has been at 1 per cent since September, 2010 – experts say more Canadians are also refinancing their mortgages before they expire to:

• Get better rates and lending conditions;

• Pay off and consolidate debts;

• Renovate their homes to increase their value and thus boost equity (the difference between the property’s value and what’s still owed);

• Buy second homes and investment properties;

• Increase cash flow , including for emergency reasons.

However, it takes serious number-crunching to determine if breaking a mortgage is worthwhile, because it usually comes with extra costs, such as penalties to get out of the contract, and legal, appraisal and possibly other bank fees, Mr. Larock and certified financial planner Tina Tehranchian of Assante Capital Management Ltd. in Richmond Hill, Ont., said in separate interviews.

Watch the ‘smoke and mirrors’

“There can be a lot of ‘smoke and mirrors’ when refinancing,’” says Ms. Tehranchian. “And sometimes the lender you talk to will show you numbers where it looks like your total payments are going down, but in reality your debt load has actually increased with all those fees.

“If you’re not disciplined enough to put that extra money you may save while refinancing into your mortgage balance, you could end up with a bigger debt load. You have to look at all the details – for example the fees, length of amortization, interest rates – that impact what your actual payments will be.”

Natasha Nystrom of the Ottawa-based Financial Consumer Agency of Canada (FCAC), which was established to help consumers make smart financial decision, adds, “Don’t borrow more than you can afford. If you are unable to repay the amounts you have borrowed, plus interest, you could lose your home.”

In deciding whether to refinance early, compare the rate you have with the current rates, suggests Mr. Larock, the president of Toronto-based Integrated Mortgage Planners Inc., who worked for big banks for 10 years.

In his blog titled “Refinancing your mortgage: Is now a good time?” he says: “Generally speaking, if you have a five-year fixed-rate mortgage at five per cent or higher, or a variable-rate mortgage priced at prime or higher, a refinance is well worth considering.

“You want the savings from your new rate to be greater than the cost of any penalty plus refinancing costs such as legal fees, appraisals, etc.,” he says, adding that $750 is reasonable for non-penalty-related costs.

Go ahead and cheat: See other lenders

Staying in a business relationship with your current lender may seem like the comfortable thing to do, but it’s not necessarily the most beneficial from a financial standpoint, experts say.

Homeowners who shop around and compare the various features offered “are positioned to make an informed decision based on their own personal situation,” Ms. Nystrom says.

Mr. Larock suggests talking to at least one independent mortgage planner who works with a large group of lenders, adding: “Sometimes there are cases where you won’t be better off, and you’re better off negotiating with your existing lender.”

He gave this example of when remortgaging can pay off:

“Let’s say you have a lot of outstanding credit card debt which can come with rates of 20 per cent or higher. If you have equity in your property and you can consolidate it into a mortgage, the cost of the penalty [to break the mortgage] can be outweighed by the savings you get if you reduce your borrowing rate on that debt.

“An experienced financial expert will say, ‘This is what you’re paying today, this is how much cash is going out the door, if you eat the [mortgage penalty], here’s what the new payment will look like and how much you will save every month.’ ”

Your borrowing ‘personality’ counts

Both Mr. Larock and Ms. Tehranchian say that, depending on the mortgage and financial situation, it’s often best to put any savings or extra money that was created by the refinancing back into the mortgage – to build equity and pay your mortgage off more quickly.

As for what type of interest rate to settle for – the two general types are fixed (which doesn’t change over the term of the mortgage) or variable (adjusted to reflect market interest rates that generally are based on the Bank of Canada Bank rate) – “half of that decision comes down to the personality of the borrower,” says Mr. Larock.

“If someone is going to sleep wondering if rates will go up, that will help establish the right type of rate to get – for those folks, fixed rates are usually the way to go.”

Mr. Henderson says he and his wife settled on the fixed, five-year rate because of the certainty of knowing their payments for years to come.

“While we raise the [condo] rent a little each year to keep up with increases in property taxes and condo fees, adding rising interest rates to that equation makes all the math a little less certain,” he says. “We also opted for monthly payments, mostly due to the fact that the rent is paid monthly.”

While interest rates aren’t expected to rise any time soon, Mr. Larock notes, “the view of what you think rates are going to do in the future isn’t always the most important factor. But it also depends on whether you can afford for rates to go up.

“Right now,” he adds, “the spread between fixed and variable rates is only about half a per cent, which is why most people lean towards fixed, because the gap is so small.”

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