In Canada, there are few things guaranteed. Snow. Taxes. Roll up the Rim to Win.
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| Wearing out your snow shovel... |
We want guarantees. We need them. So when we want that feeling of security that only home ownership provides we turn to the first thing that we think may be able to help us financially; our parents.
But what if you are past that stage of wanting/needing parental assistance? Your second choice is most likely your financial institution. After all, you've been with them probably ever since your parents set you up with your first bank account in a perhaps misguided attempt to teach you about savings and earning interest.
I know that's where I started. I was told that the banks will 'give me money on the money i give them'. It was called interest. So every once in awhile my folks would take me to the local bank and I would give the teller my bankbook and some birthday money from Gramma and the teller would take my money and give me the book back. Inside it were numbers; my previous balance, the money the bank gave me for keeping it there, my deposit and then finally my new total.
The one time i remember registering how much my bank was giving me it was 11 cents. I probably had not been in there for a few months. I remember thinking 11 cents isn't very much. Fast forward 30+ years and I'm still wondering when I'm going to be getting paid for giving my money to the bank to hold for me so that robbers wouldn't get it.
I digress. You are a grown up now and want to buy a house. You need a mortgage because you don't have $400,000 built up from the interest you have earned from your bank. So, after your parents say no, you decide to go to the only place you know that deals with big amounts of money; your bank.
Is that your smartest choice?
No.
It is, however, your easiest choice.
So how much is that convenience worth to you? If I said that you could save $500 in one year for one hour of your time, would you do it? What if I said $1000? How much savings would it take for you to honestly look into other mortgage options? What if I said I could save you paying $15,000 extra dollars to your bank over 10 years that you don't have to pay?
Surprisingly, most of us won't do it. We have been ingrained/conditioned since childhood to stay with that one bank. Most don't make that choice out of any informed decision, it's just always the way it's been. And the banks know that is their strongest selling point.
A couple years ago you might remember the Occupy Wall Street movement which brought attention to the enormous profit-driven mechanisms of our society. One by-product of that movement was a lot of people began to look at places they felt their money would be better stored. They closed their accounts from Big Banks and moved to Credit Unions, which are answerable to every member and tout a 'local profit mentality'. Heck, that's what I did.
So, what's the point of this rambling article?
You have choices in what you do.
For instance, you can continue to support your Big Bank with their record $29 BILLION in profit that is of little value to 99% of their customers but only financially rewarding for the that 1% the OWS reminded us of. Any 1 of Canada's Big 6 Banks could give $1 million to every person in Canada and still turn a profit in any quarter of the year.
Yet, they will still charge you a minimum of $10/month to have an account with them. They will charge you service fees for ordering cheques or creating payment plans. You will be charged for using your debit card at a different institution. It's not that they need that money, it's how they make as much money as possible to help pay that 11 cents in interest to the next generation. And they definitely won't be trying to give you the best deal on anything mortgage-related.
Well, as a mortgage broker, I am here to tell you that you are a valued customer to a company you may have never heard of yet. Here are 5 reasons to consider asking a mortgage broker to help you find the best mortgage at no cost to you;
1) Profits
Here are the profit numbers for 2013 of The Big 5 Banks Canada;
TD Bank -$6.7 Billion
RBC -$8.43 Billion
CIBC -$3.4 billion
Bank of Montreal - $4.2 Billions
ScotiaBank - $6.7 Billion
Don't get me wrong, profits are a good thing. Every business needs them to stay in business. But when does profit become too much? When does it appear that business is no longer looking after their customer's best interests?
It's like eating marshmallows. Everyone loves marshmallows but at a certain point, you are going to look at the fat kid and say 'stop eating all the friggin' marshmallows!' But instead of marshmallows it's money.
A lot of Big Banks' profits actually comes from the interest made on mortgages that are currently being held by their customers. Mortgages are a very lucrative business and that is why they want yours. It's why they say if you qualify for a mortgage at X rate, then they will 'reward' you with a mortgage at Y rate. It sounds good until you realize that they are only offering you that Y rate as the smaller competition is already offering it and they don't want you to take your business elsewhere.
It's like the two gas stations across the street from each other that continually match prices and never truly go into a price war. They want what's mutually beneficial so they fix their prices, agreeing not to make 'too little' profit. That's how that echelon of Big Corporation capitalism works.
2) Ethics
There's a scene in the climax of Billy Madison where Billy has to compete against his deceased Dad's #1 business guy over who is going to take over the Madison Empire in an academic decathlon. In a winner-take-all format, the two have to answer a question on a range of educational topics. The bad guy has to talk about Business Ethics. Or you can watch the whole clip here;
3) Competition
Canadians love being the underdogs, except maybe when it comes to hockey. But we like to pretend we are the underdogs even then. There is something to be said about finding that 'place' that nobody ever heard of and where you can get something that you saw at Wal-Mart for $2 cheaper. It happens. And when it does, we feel kind of good about it.
Why not be the same way with financial institutions? All credit unions have mortgage departments for their members. There are many institutions that concentrate only on providing mortgages. And as these small institutions become bigger, look for more predatory action by the Big Banks, such as ScotiaBank acquiring semi-small ING Direct into their business profile.
Competition is healthy for everyone and is what actually is giving us such low interest rates currently, it's that competition that is stopping Big Banks from charging the highest rate they think they can.
4) Penalties
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Penalties are a natural by product of breaking promises. You promised to pay X amount of dollars per month for Y amount of years. They are believing that you will do that, which is why they gave you that money. Inside of that payment is Z amount of money that is profit (the interest) that they earn for giving you their money.
But what if you find out that you could pay much less Z at a different lender? You want to break that promise and figure it should be fine as you are going to be giving them back all of X - it's not like you are going to be ripping them off. They get all their money back. But they don't want X back, they want the Y.
So you try to say thanks but no thanks and then someone points out the fine print; usually the standard is that you either have to pay the greater of 3 months interest or the Interest Rate Differential - an interest rate that equals the difference between your original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of the mortgage. Then they say something like 'if you want to give us our money back, it will cost you $12,000.'
And you say 'WHAT THE F@#%?'
And they will just smile and say, that's what you signed. Right here. It's in your contract. All nice and legal.
So you feel that financially you have no choice but to wait it out for a few years, at which time you will have probably have forgotten how mad you were and just re-sign with them Because That's Just How It Is.
Smaller lenders tend to keep their penalties much more 'reasonable' as they want to keep your business and realize that 'bait and switching' isn't the best way to gain customers.
5) The Traps
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| Drinking 7up was NOT the source of Wayne Gretzky's talent or beautiful hair |
The biggest trap is by far the 'posted rate' vs your 'actual rate'. It sounds great that you are getting the lesser of two evils and that's how they will get you in the door and sitting across their desk. But when it comes to making changes to your mortgage (such as perhaps buying it out early) the banks will be basing all changes or charges on the 'posted rate' not the cheaper one you are currently paying on.
Many Big Banks will also send out a mortgage renewal letter with the posted rates and 'ask' for you to re-sign without suggesting there is an alternative, like the rate that they currently are offering others if you already qualify for the posted rate! They figure (and rightly so) that most mortgage owners won't bother asking if that is the best deal their Banks will give them. They just assume it is and want the convenience of signing a document that allows them to stay in their house for 5 more years with little fuss. Most customers won't realize that they are paying thousands more in interest that they didn't have to simply because they trusted their current Mortgage lender!
Which brings me back to #2. Business ethics.
So you have to decide if spending that hour of your life talking to a mortgage broker is worth the thousands of dollars you can save in the long run. It is your choice to decide if you want to stick with a Big Bank you know and trust vs. going with a company you may have never heard of before. But the long, rambling point I am trying to make is that for you to know there are options out there that you don't know about but a mortgage broker does.
You just have to make that first move and call one. Or email me.
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