Fight for the best rate

Question

Our $75,000 mortgage is up for renewal this September, and we also have a home equity line of credit (HELOC) of $101,000. Should we combine these into a mortgage? We are not sure what would be better to save on interest long term. We have always trusted our bank in the past to give us sound advice, but we are wondering if we should consider using a mortgage broker?

Answer

I am very loyal to my bank. When I was 10-years-old I went with my dad to the local branch in London, Ont. and signed up for my very own account. I have been with them ever since, and am mostly happy with the service and advice I receive. With one exception: my mortgage. They don’t hold my mortgage for one very simple reason—they couldn’t offer me the best rate.

Don’t let loyalty overshadow interest rate

You have always trusted your bank and they may indeed have given you sound advice. But have they given you the very best rate on your mortgage?

I find that a lot of people—especially those who are happy with their bank – can’t be bothered to shop around on rates. That can be a huge missed opportunity. It’s one thing to stay loyal to a restaurant that you like, even if they charge a little more than the competition down the street, but it is another thing to stay loyal to a bank that charges more than another on interest.

Let’s say your have a $300,000 balance outstanding on your mortgage and you are paying 0.5% more than you have to for five years. That amounts to an extra $1,500 per year or $7,500, and that’s before compounding. Ouch!

This is not to say that banks can’t get you the best rates—often they can—but they don’t necessarily provide their best offer when you come in for renewal. Why? Because they don’t have to. Most people are like you: loyal and less likely to shop around.

Finding the best rate

A mortgage broker works for you. A mortgage specialist in a bank works for the bank. A great broker will shop around for the best rate and negotiate a mortgage that will provide you with the features that you want. They are compensated by the lender, of course, but they at least have many different lenders to choose from so they can be more objective about what they are offering.

A bank rep can only offer you products from that bank. You may get the best rate they have, but you’ll likely have to push hard for it.

A mortgage broker, who asked not to be named, told me he often beats bank pricing because “the bank model is to only be competitive if they need to be. At the end of the day, a bank can normally meet my pricing—they have deep pockets—but if they can charge the consumer more, they will. A mortgage broker should be getting you the best price upfront and handle negotiating for you.”

Continuity of service

Another advantage of working with a mortgage broker is that they stay with you for the term of the mortgage. You can ask them questions and have them run different scenarios for you on pre-payment or refinancing. And while banks can provide those same services, it is sometimes harder to maintain a relationship with one individual over a long period of time because of changes at the branch.

HELOC’s have higher rates

Now, you also asked whether you should combine your mortgage and your HELOC together. The answer is likely yes, because the rate you’ll be able to get on the mortgage could be 0.5 to 1 percentage points less than what you’ll get on your HELOC. You’ll give up some flexibility, but per your question, you’ll save money on interest. Whether you go with a bank or a mortgage broker, this is a great question to ask them.

Shop around

Even if you decide not to use a mortgage broker, promise me you will shop around even if you end up back at your bank. You need at least three quotes to ensure that you are getting the very best rate possible. Given that you’re signing on the dotted line for five years, this research will be well worth your time, both for the dollars you can save and the confidence it will give you in your decision.

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.