Mortgage Shopping 101
A crash course on shopping for the right mortgage professional
The single largest financial transaction of your life is far too important to be managed by someone (be it bank personnel or otherwise) who is not capable of advising you properly and managing the issues that may arise along the way.
How do you identify the right mortgage professional? You ask the right questions, and listen carefully to the responses. Ask the following four simple questions which any competent mortgage professional should be able to answer. If they seem to have no clue, find a mortgage professional that does!
1. How do financial institutions (FI's) determine the interest rates they charge on their mortgages? For variable rate mortgages, the only right answer is the Bank of Canada's Bank Rate.
Like any other business, Banks make a profit when their revenues are less than the cost of generating those revenues. In the case of a variable rate mortgage, the revenue that is generated is interest revenue. How are the costs of those variable mortgage funds determined? The answer is the Bank of Canada Bank Rate.
The Bank Rate is the rate the Bank of Canada charges FI's for lending overnight funds. For example, if the Bank Rate is 3%, then the banks will typically charge an extra 1.75% on top of that to determine the Bank's Prime Rate, which determines the rate charged on variable rate mortgages. To determine the rate on fixed rate mortgages, FI's use the bond markets as a guide. FI's cost of funds for fixed rate mortgages are based on mortgage backed securities, specialized mortgage bonds, or Government of Canada Long Bonds.
To determine rates on fixed rate mortgages, FI's charge a premium to the rates of mortgage backed securities, specialized mortgage bonds and Government of Canada Long Bonds. Your mortgage professional should at least understand the fundamentals of how mortgages are priced.
Do not work with a lender that does not understand how mortgages are priced. At a mortgage lender, we constantly review the bond markets and economic environment that drive interest rates. That is why we can confidently recommend appropriate mortgage strategies and manage your mortgage for the long term.
2. What is the current state of the mortgage market today, and where do you see it going in the near future? You wouldn't get a root canal from a car salesman, so why would you get mortgage advice from someone who cannot explain how the bond markets interact with mortgage interest rates and where they are headed.
A mortgage is the largest debt you will likely ever undertake, so find a mortgage professional who can give you the proper advice.
3. What strategy are you suggesting and why? The answer you do not want to hear is “well my best five year fixed rate is…”. You want to run away as fast as you can from lenders who are simply quoting rates. You want to deal with the mortgage professional that takes time to understand your financial situation and formulates a strategy based on that financial situation. With the largest debt of your life, you want to be dealing with someone who has developed a plan for you.
4. Will you commit to me that you will personally manage my mortgage over the long term? This is the most important question. Many lenders, especially bank personnel, have no desire or ability to proactively manage your mortgage over the long haul. The simple truth is bank personnel are not motivated financially to proactively manage your mortgage in order to minimize the long term cost of financing your real estate holdings.
Ask yourself these simple questions: How can I take advantage of changing mortgage market conditions if no one is keeping an eye on them for me? If rates drop in a few years, who will ensure I do not miss an opportunity to renegotiate? If I am into variable rate mortgages, why would I get that mortgage from someone not committed to monitoring it for me? Getting and managing a mortgage is a long term commitment.
While many lenders are satisfied with providing transactional services that end at closing, a mortgage lender believes that its long term mortgage management service begins at closing. Only by making this long term mortgage management commitment will we deliver on our promise to significantly reduce your total cost of home ownership. BE MORTGAGE SMART! ASK THE RIGHT QUESTIONS…GET THE RIGHT ANSWERS!
So, if you are thinking of selling and buying a homes this year, should you buy or sell first? I've had many clients purchase before they sell. I just want you to have all the information so you can make the best decision for yourself and your family. You may read more about buying or selling first here
Read about what happened in real estate last month.
I wish you much success, good health and happiness today and always!
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