Open vs Closed? Making the most of your mortgage
by Hugh Hardy
In today's column, I thought I would talk a bit about how to get the best mortgage. My views regarding mortgages have changed quite a lot in the last few years, and I thought I would share some of my conclusions with you.
For one thing, I am pretty down on closed mortgages. There are plenty of reasons to have a closed mortgage - at least for certain people. Some of these reasons might include the following: if you absolutely can't afford an increase in your mortgage payment over the next few years; if your company would pay any mortgage discharge penalty; if you were transferred before the end of the mortgage term; if your mortgage approval was conditional upon your having a locked-in mortgage, etc.
I think that there are a lot more reasons not to have a closed mortgage. So let's cover the downside of having a closed (or "locked-in") mortgage. One thing that has always cheesed me off is the size of the penalty for a homeowner who wants to discharge his or her mortgage before the end of the term. Typically, on a $100,000. mortgage, the minimum penalty to discharge early is around $2,500 or more. This is a fairly hefty sum of money. You wouldn't believe the number of customers I have had who have ended up paying penalties like this - or even larger! If interest rates have gone down significantly since you took on your mortgage, the penalty could be the "interest differential". I won't go into a definition of that term right now. Let's just say that I've seen interest differential penalties on $100,000. mortgages that were in the $6,000. or $7,000. range! So the pure cash outlay if you have to break out of a closed mortgage is a good reason why I don't like them (and lenders very, very rarely negotiate penalties). I'm also just plain opposed, in principle, to paying money to be free from a loan.
Another advantage of an open mortgage is that interest rates for open mortgages are typically a fair bit lower than their closed counterparts. This means that you can save money every month with an open mortgage. Should interest rates go up, you still have a margin before you are paying more than you would if you had locked-in.
These days, most lenders have open mortgages that automatically "roll over" and are extended - usually with no fee (or maybe $50 in some cases). So you don't have to be attending to your mortgage on a regular basis.
The second issue that I would like to cover in today's column is about making sure that you negotiate your mortgage when buying a home. You should know that lenders are all very competitive when it comes to negotiating new mortgages. It might help you to know what kind of discount you can get from the "posted rates". Typically, a quarter of a percent discount is a no-brainer, a half a percent discount is easy, a three-quarter percent discount is a real coup, and a one percent discount is about as common as are lottery winners. Now you don't have to guess how negotiable your bank or trust company should be!
Besides negotiating the rate, many lenders offer incentives such as ... free property appraisals (necessary to obtain the loan), cash back on closing, money down on your VISA, money towards your legal fees or land transfer tax, first 3 months of mortgage payments free, deferral of first months payments... the list goes on!
I would encourage you to negotiate and shop around when looking for a mortgage. The banks count on the fact that customers are not as aware of their ability to negotiate as they should be. After all, how many billion dollars was it that the banks made in Canada last year? Gee, I don't have enough fingers and toes to keep track of that one!
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