5 mortgage-switch surprises to avoid

According to the Canada Mortgage and Housing Corporation, mortgage promotions and offers may get even better than they were a few years ago, thanks to Government of Canada 5-year bond rates dropping to levels experienced in 2014, and creating a low mortgage rate environment in 2020. If you’re thinking about shopping around for a cheaper mortgage, it’s important to understand the fine print before you make a move, or you could be surprised by fees and service changes that make your new and “better” home loan much less of a deal. Here are 5 things you should watch out for:

1. Fees

Not only are there fees for leaving before the end of your 5-year term, but there are also fees for taking on a new mortgage. Here are the important ones to worry about:

Interest penalty: The amount is usually three months of interest payments, or the “Interest Rate Differential” (IRD) between the current mortgage rate and the lender’s rate of the remainder. Potential new lenders will often give you incentives to offset some of the penalty from leaving your current mortgage, but that’s often cancelled by the penalty you’re charged. So unless you’re leaving for a very good deal, it’s usually not worth it on this merit alone.

Appraisal: There are costs to having your property assessed, but you can negotiate with your new lender to offset that cost.

Legal fees: Lenders often hand off legal paperwork to lawyers that they hire, but charge you for it, which can depend on the mortgage you currently have. It’s best to negotiate this if the fees you’re charged differ from what you were originally quoted. Another common-but-annoying fee one is a discharge, from the lender removing the mortgage charge designation from your property. Again, ask your new lender if they can offset this.

Property tax administration fee: Lenders may charge service fees to administer payment of your property taxes through them. To avoid this, just pay it on your own.

2. Expensive banking

Sometimes financial institutions offer mortgage rate deals if you move some or all of your other banking products to them. Compare all the fees and rates on every product included before you agree to do so. Negotiate the best deal for each account and don’t switch anything that’s not to your benefit.

3. Poor customer service

This should be obvious, but lenders should value your time and money. As such, they should treat you with respect, and be helpful and transparent with any concerns that you may have.

4. Life changes

These days, situations like periods of unemployment, a divorce, having a baby, coming of a certain age or even an uptake of debt, can severely affect your qualifications for certain mortgages. Some new lenders will offer exceptional customer service and care by helping you qualify, but honesty and transparency is a two-way street. You should be honest and sincere so your lender will treat you the best way possible.

Similarly, if you have mortgage (or line of credit/credit card) insurance through your bank, that insurance will end when you switch. But you’ll want to continue to have enough coverage so that your debts don’t become a burden to your surviving family members should you pass away. Know that minor changes to your health or simply getting older can affect your ability to obtain mortgage insurance with a new lender, so read the new lender’s insurance certificates about pre-existing conditions that might exempt you. Ask the new lender to apply for the mortgage insurance you want at the same time you do your initial credit application to ensure you’re approved before proceeding to switch. If you don’t qualify with the new lender’s insurance provider, you can still seek insurance with a different insurance company before switching. Many financial planners will argue that it’s better to have term life insurance to cover your mortgage and other debts, since lender-provided insurance offers a decreasing payout (the amount you owe decreases over time, so your coverage amount decreases, too, while term life insurance coverage does not change throughout the term you’ve signed up for).

5. Unexpected Overdrafts

While switching, you’ll likely sign a short-term renewal until all the paperwork to switch to your new mortgage is completed. In the process of paying for this renewal, there might be instances where lenders will charge you more than you expect. The best course of action is to have buffer funds in your account, and carefully keep track of all the money lenders withdraw from your account, to make sure transactions are accurate. Nothing is worse that a nearly-$50 NSF fee because your lender accidentally took out money twice, and then having to rectify the situation.

Overall, switching or renewing mortgages with a different lender can be overwhelming. Despite all the pitfalls, there are many ways to ease the process, such as performing your research and paperwork well-ahead of maturity, negotiating whenever it’s reasonable, and always asking questions.

Have any questions about your upcoming maturity? Contact us at Pegasus for all your mortgage and lending needs!