Posted on Wednesday 26 November 2014
The mortgage on your home is probably the largest piece of debt that you will ever take on. According to Canadian Real Estate Association data, the average Canadian house price in August 2014 was just under $400,000, and house prices are expected to continue to rise. When you’re likely to spend decades paying off a loan, it makes sense to negotiate good terms to begin with. While you shouldn’t expect miracles, banks do have some discretion over the terms of their mortgages. In this guide, we will teach you some smart ways to negotiate and get the best deal on your home loan. Be Prepared Preparation isn’t just for Boy Scouts. Before you step through the bank door, do your research on the mortgage options that are out there. Mortgages are not always directly comparable from bank to bank because the small print varies so much, but being able to point to a cheaper rival can make a bank compete for your business. Ask your lender why his bank doesn’t offer as good a deal as their rivals, pointing to specifics, whether those are interest rates, penalty fees, or payment schedules. By the time you are negotiating your mortgage, you should at least know the difference between a fixed-rate and a variable-rate mortgage. Have a mortgage payment strategy planned out. If you expect your income to rise in the future, look for a mortgage that will allow you to increase your payments without penalty. Picking a mortgage that fits with your income patterns will help you during negotiation, too. Of course, that assumes that they actually want your business in the first place. Another piece of research that you should do is to work out how much you can afford to borrow. Every major bank in Canada has a mortgage calculator on its website that will tell you how much a given mortgage will cost you every year. Banks look at two measures of how much you can afford in mortgage payments. The Gross Debt Service ratio divides your household expenses by your income to see how much money you will have left for mortgage payments. Household expenses include existing mortgages, heating, property tax, and half of any applicable condo fees. The Total Debt Service ratio also includes any recurring debt payments such as car loan payments or credit card bills. The lower your ratios are, the better. Specifically, lenders look for a GDS ratio of less than 32% and a TDS ratio of less than 40%. If your ratios are significantly lower than that, point to them during negotiations. Even if they aren’t much below the line, being able to present your figures and research demonstrates some financial literacy. Financially savvy borrowers default on their mortgages less often, so banks are more willing to make a deal. The last piece of information that you will need is, perhaps unsurprisingly, your credit report . Lenders like to see a high credit score and a long and untroubled credit history. Your lender knows as well as you do that your mortgage the biggest piece of debt that you will have, so a history of paying back smaller debts on time and in full will do a lot to convince them that you are creditworthy. Negotiation Tactics Beyond going in prepared, the best advice is to not only focus on the interest rate. The interest rate is the big figure that will determine how large your payments are, but there are a lot of other fees and rules associated with a mortgage. While third-party costs like inspections are almost always off the table, you should absolutely go through the list of fees with your lender. Ask why each one is there and, if you don’t like the answer, try to negotiate it downwards. If necessary, sweeten the deal. Signing up to other financial products with the same bank, like credit cards can make it more likely that they will cut you a better deal on your mortgage. The golden rule is to assume that everything is negotiable and to always ask for a better deal, because those that don’t ask, don’t get. Finally, if research and negotiation doesn’t sound like something you would be comfortable with, you can hire a licensed mortgage broker to do the work for you. Mortgage brokers negotiate for a living, and often have access to better deals than the general public because of their ongoing relationships with lenders.