I just renewed our mortgage for the last time - ever.
We locked into a five year term and the house will be paid off well before it ends. Any move from here would be a downsize so it's pretty safe to say the mortgage renewal ritual is over for me.
After 25 years of home ownership, there's a lesson for younger homeowners that can get their homes paid off quicker and save tens of thousands of dollars: basis points really matter.
For those who don't know, one hundred basis points equals 1 per cent. Banks talk to us about the cost of debt in percentages, but banks talks to other banks about debt in basis points.
That's because our mortgages transcend our neighbourhood banks and enter the multi-trillion dollar global debt market where they are morphed with other mortgages and debt instruments. A difference of a few measly basis points between what lenders charge and what it costs them to borrow can translate into billions of dollars in profit.
That's what the banker across the desk is thinking at mortgage renewal time, and that's what you - the consumer -- should be thinking too.
The ritual often begins weeks ahead of the renewal date with a phone call from the bank offering a mortgage rate below the sucker rate - more commonly known as the posted rate on the bank's website. It sometimes comes with a threat that the offer could expire if you don't act now. After some haggling the offer to me was 3.99 per cent, or 399 basis points for a five-year closed mortgage. The sucker rate was 5.24 per cent, or 524 basis points.
I took a pass and was contacted by another representative two weeks before the renewal date who, after I threatened to take my business to a mortgage broker, offered 3.09 per cent.
At the time, the best rate for a five-year closed mortgage on broker websites was 2.84 per cent. Mortgage brokers are great. Posting the best rates on their websites gives the borrower leverage. If you choose to go with them, most are compensated by the lender — not you. Brokers like RateHub.ca also provide calculators to let you do your own number crunching and see the cost in dollars.
After mentioning mortgage brokers I usually get a slight whiff of condescension at the pettiness of bickering over a few basis points, and ungratefulness at not appreciating a rate so far below the sucker rate.
In this case, I was also informed that the penalty to be imposed by the bank for taking my mortgage elsewhere would outweigh any gains from a few basis points — not true, but a good point. Touché.
In the end I went to a broker at Mortgage Intelligence who came up with the bright idea of negotiating my mortgage with his contact at the same institution. I signed off at 2.85 per cent.
I saved a few hundred dollars this time around but for an illustration of how a few basis points have, and can, make a big difference over several years let's plug in the same rates for a mortgage of $300,000 and biweekly payments of $1,000.
- Total interest on the "sucker" rate of 5.24 per cent would be $156,366.
- Interest on the "special" rate of 3.99 per cent is $100,383.
- The "final" offer of 3.09 per cent generates $70,203 in interest.
- And the 2.85 per cent settlement rate would generate total interest of $63,152.
In the end, the homeowner with a 2.85 per cent mortgage saves over $90,000 from the sucker rate and pays the house off nearly three years early.
Petty? I don't think so. No wonder the banks fight so hard for a few basis points.