Renewing Your Mortgage: The Cost of Loyalty

By Brennan Valenzuela
Ratehub.ca

What if you found out the coffee shop you popped into everyday on your way to work was overcharging you for the same coffee being sold down the street? Would you stop being a regular? Sure, the barista might know your name and order, but are they giving you what you want at the best price? While many of you may be willing to pay a few extra dollars for coffee, would you extend that same loyalty to your mortgage provider? What if you found out your current provider's mortgage renewal offer was going to cost you thousands of extra dollars? How valued would you still feel for your loyalty?
BANK RENEWAL LETTERS

If the maturity date of your current mortgage term is approaching, chances are your lender has already bombarded your mailbox with a few renewal letters. DO NOT SIGN THEM. I say this because banks take full advantage of the fact that many homeowners do not compare mortgage rates from other lenders at renewal time. The offer on the renewal letter is usually a non-competitive interest rate. For example, according to an anonymous mortgage broker, National Bank tried to offer his client a 5-year fixed rate at 5.10 per cent. At the time of the offering, National Bank was advertising a 5-year fixed rate at 3.99 per cent on their website. If that client was trying to renew a $350,000 mortgage with 20 years of amortization left and signed for 5.10 per cent, their mortgage payment would have been $206 more per month than if they had signed for 3.99 per cent. The lowest 5-year fixed rate currently available on RateHub.ca is 2.94 per cent.

Here's a chart showing the monthly payment difference:

Mortgage Rate	5.10%	3.99%	2.94%
Monthly Payment	$2,319	$2,113	$1,927

PAYMENT SCHEDULES

Accepting a higher mortgage interest rate isn't the only way a mortgage renewal letter can cost you financially. Sometimes, the renewal letter may offer a different payment schedule than the one you currently have. For example, let's assume a client had previously paid their mortgage using an accelerated bi-weekly payment plan. Problems will surface if the bank's renewal letter only lists 'monthly payment' and 'bi-weekly payment,' leaving the unsuspecting client to check off the latter, assuming it is referring to accelerated bi-weekly.

What's the difference between a bi-weekly and accelerated bi-weekly payment schedule? Let's use RateHub.ca's mortgage payment calculator, to see what would happen with the example from before. We compared a $350,000 mortgage with a 20-year amortization, but renewed at a 5-year fixed rate of 2.94 per cent.

Payment Structure	Bi-weekly	Accelerated bi-weekly
Total number of payments in one year	24	26
Mortgage payment amount	$889	$964
Principal paid after 5-year term	$69,371	$79,823
Interest paid after 5-year term	$46,202	$45,463
Mortgage balance after 5-year term	$280,629	$270,177

The accelerated bi-weekly schedule would have helped you pay off an extra $10,452 after the 5-year term reaches maturity, compared to the bi-weekly payment plan.

HOW BANKS ARE GETTING AWAY WITH IT

Banks are likely making a healthy profit from homeowners who acquired a mortgage before the financial downturn in 2008 and who are renewing now. Since 2008, interest rates have fallen tremendously. An examination of Canadian mortgage rate history shows that the best 5-year fixed rate in October of 2007 was 5.69 per cent. For any Canadian who has not kept up with interest rate news since taking on their mortgage, a renewal letter of 5.10 per cent could look like a deal.

Toronto mortgage broker Chris Molder says Canadians should be doing their homework, even at the cost of convenience and loyalty. "You should find out what your existing lender is willing to offer you, and then find out what the market is offering, either through a RateHub.ca or through a mortgage broker, and compare the two. Don't fall into the trap of convenience. Never sign without doing your homework."