When it comes to mortgages there is a very strong focus on rates and how and where to get the lowest rate in the market. We have stood behind our guarantee that we offer the lowest rates in the market but we would like to stress the fact that there is more to the mortgage story. Although the rate determines the amount of interest you will be paying over the course of the term there are other factors to consider that will potentially save you thousands of dollars over the entire life of your mortgage.
One very important consideration is the prepayment privileges offered as part of the mortgage product you will be receiving. The ability to add 10-20% to each of your payments and an additional lump sum of that same percentage every year significantly increases your power to repay at a faster rate. With your principal being reduced at a faster rate it will subsequently cause your interest payments to be lower as they are based off a principal loan amount that is shrinking faster than accounted for in the original amortization schedule. Often times the very lowest rates are what we call “No Frills Products” that do not offer these very lucrative prepayment privileges, which by some standards can be considered a drawback if you are not able to make these prepayments.
This is just one factor but perhaps even more important is who these mortgage products are being offered by. There are two different types of lenders that exist in Canada; Balance Sheet Lenders and Non-Balance Sheet Lenders. A “Balance Sheet Lender” is any chartered bank in Canada. They are referred to as “Balance Sheet Lenders” because they hold your mortgage on their books as an asset. These Lenders can only increase the value of their asset (your mortgage) by increasing the spread between their cost of funds and the rate at which you pay interest on your mortgage. The opportunities to do this occur when a variable rate client is looking to lock into a fixed rate and when a client’s mortgage is maturing. Everyone realizes that there are penalties associated with breaking a variable rate mortgage (3 months interest) and that even with a maturing mortgage there is a level of inconvenience associated with collecting documentation and moving to another lender for a slight decrease in rate. “Balance Sheet Lenders” will use these barriers to exit to their advantage and charge marginally higher rates to existing clients.
It is for this reason that we advise our clients to deal with Mortgage Servicers and Investment Banks who have their mortgages guaranteed by the Canadian Government and sell the end product to pension plans and mutual funds. As a “Non Balance Sheet Lender” a mortgage servicer has the same motivation as you, they want you to be their client and stay as their client based on rate alone. Since your mortgage is guaranteed by the Canadian Government there is only one rate that you can be charged, there is no ability for the lender or servicer to increase your interest rate, and due to the efficiency of the market they cannot make more money by selling you a higher rate when you lock into a fixed rate mortgage from a variable, or when you renegotiate your mortgage at maturity.
By aligning the motivations of the client, the broker, the servicer, and the lender through a compensation model that rewards long term clients with continued low rates everyone wins.
The client never has to switch lenders as they are always offered the lowest market mortgage rate.
The broker is paid a retention bonus for servicing the client over the life of the mortgage and keeping the client with the same lender.
The Servicers are paid an annual fee to manage the mortgage cash flows and save a great deal by retaining existing clients and foregoing the higher costs of attracting new clients. Finally the Lenders, who are all Institutional Lenders in Canada, are offered a risk free investment (Government Guaranteed Canadian Mortgages) with a higher rate of return than Government of Canada Bonds. In a sense, Non Balance Sheet Lenders look to become teammates with you and your broker, which we hope is us.
To summarize, although rates are very important and should be something you take into serious consideration there is a much larger picture when it comes to your mortgage and we at MorCan Direct hope that we shed some light on the not as well-known aspects of mortgages. We sincerely hope that you found this to be sound, unbiased mortgage advice and was helpful step in your decision making process.