I used to be a mortgage broker, so I’ve seen plenty of joy when a mortgage is approved and disappointment when somebody with bruised credit got denied. Even if someone gets a mortgage, it’s still a pretty stressful process. There’s always a mountain of paperwork, and there’s a nervous few days waiting for the lender to announce there’s no more conditions.
This is part of the reason why when it comes to mortgage renewal time, many borrowers just accept the terms the bank dictates on the renewal letter. Although that’s the easiest solution, it’s almost never the best one.
Let me explain a little further.
Typically when a lender works with a mortgage broker, it’ll give brokers access to its best mortgage rates
. Lenders know clients who work with brokers tend to be price sensitive, so they tend to get a lender’s best rate.
Just about all the lender’s cost for a mortgage comes right at the beginning of it. It has to underwrite the loan, pay its legal team to produce the actual mortgage contract, and pay the mortgage broker her commission for arranging the deal.
Thus, the first five-year term of a 25-year amortization isn’t so profitable. The lender is still making money, but the real profits are made over the next 20-something years. At that point, the only work involved is answering the phone if the borrower ever calls and sending out a renewal notice every few years.
Lenders also know borrowers aren’t very likely to switch during renewal time. Switching is a pain, and most borrowers don’t want to go through the application process again. So the lender pulls a bit of a sneaky move and won’t offer the borrower its best mortgage rates. Instead of a 2.99% five-year fixed rate it might offer a new customer, an existing one might only get offered 3.29%. It’s still good enough to fool someone who doesn’t follow rates closely.
A real life example
I know a couple who bought a house worth about $300,000 in 2008. Interest rates were higher back then, but they still got hosed on their interest rate, which came in at 6.5%.
As rates went down, this couple even looked into refinancing, but couldn’t afford to pay the interest rate differential (more details on IRD can be found here
), which would have been more than $10,000. So they paid faithfully, waiting for their term to expire so they could finally pay a reasonable rate in 2013.
2013 came, and the lender sent out their renewal. The renewal offer came in at the bank’s posted five-year fixed rate of 5.95%. Talk about getting excited for nothing!
This story doesn’t even have a happy ending. This couple had no idea they had the option of taking that mortgage to a different lender or negotiating. They just accepted the renewal.
Say they could have saved 2% per year for those five years, and their mortgage balance was, on average, $250,000. That’s $25,000 in extra interest this couple paid because they didn’t know any better. That’s more than $400 every month. Sure, it’s an extreme case, but even a quarter or half of a percent adds up over time.
Perhaps you can argue that the lender has the obligation to offer a borrower the lowest rate, but it just doesn’t happen in the real world. Lenders know that once they have you, chances are you’ll stick around for the entire mortgage.
You have two options to break the cycle. You can either do your research beforehand and threaten to leave unless you get a better rate, or contact a mortgage broker and move to a different lender. Leaving during renewal time likely won’t cost you a dime, and the interest savings could be substantial.
Your lender doesn’t really have your best interests at heart. Knowing that come renewal time could save you thousands.