Loan officers can seem an intimidating bunch. After all, when it comes to a mortgage, they stand over you with the power of a thumbs up or thumbs down on your ability to purchase a home or commercial property.
But they're really not all that bad; it's just the way they're built. Risk-aversion is a major part of their DNA: the more protection they have, the higher the interest rate, the more down payment they demand – the less risk they face. And they know you need them to buy that property, so they might begin to feel a little powerful themselves.
Don't cave. As long as you ask the right questions, you can walk away with a mortgage that will save you thousands of dollars and lessen your own exposure.
Your realtor should have a good understanding of the mortgagee mindset, and be ready to help you identify your needs and alert you to opportunities to save on your borrowing costs. As long as it's within the scope of my expertise, I'm always happy to help walk clients through the requirements a bank might have – free of charge. I consider it part of my job. I'm also happy to introduce my clients to a good mortgage broker. Depending on your situation, a mortgage broker can be a major help in finding a loan that's right for you. (To date, I've never received a referral fee for this recommendation, and if I did, I'd have to report that to you. I’ve just been happy that my clients were getting the best possible financing advice, guidance, and products.)
But consider these three "secrets" your lender likely won't volunteer.
1. I can offer you a lower interest rate
Take that initial interest rate offering with a healthy skepticism. The big banks usually start high – yes, even in these times of historic interest rate lows! After all, if you're willing to accept it, they make thousands of dollars more over the course of your mortgage. But more often than not, they have some discretionary leeway, and all it takes is for you to ask the question.
Is it worth it? A mere half-point reduction in your interest rate can save you substantially. If you've purchased a $400,000 house with 20 percent down, and you have a 5-year term at 3.75 percent interest, you'll pay a total of $56,749 in interest over the five years. Reducing that rate by only .5 percent saves you $7,845 in interest over that period. (And even with lower monthly payments, you come out ahead by nearly $2,600 on your principal payments; you'll have $275,071 remaining on your mortgage versus $277,668.)
2. Push-back on that guarantee? Well, okay
I recently worked with a client who owns a successful business bringing in more than $50 million in revenue each year. The company was ready to put 35 to 45 percent down on a $2.5 million office building, in a prime area of Toronto, with potential for expansion, and sought a mortgage from their main financial institution – one of the large Canadian banks. Incredibly, the financial institution asked for not only a corporate guarantee, but a personal guarantee from all three corporate officers. In a worst-case scenario, it might be reasonable to expect them to ask for a single personal guarantee, but in this case the bank was really covering itself. I explained to the client that he should push back and aim to only give the corporation’s guarantee and avoid the personal exposure.
3. Everything's negotiable, including "standard" penalties
Locking in to a longer term can be good for your peace of mind. But what happens if you have to suddenly sell your property sooner than you'd planned, or if two years down the road you come into some extra money and would like to use it to reduce your mortgage? (A single lump sum payment can save you a vast amount over the course of your mortgage, since it's immediately applied to the principal – which means less revenue for the lender than it had planned to receive.) The lender is unlikely to offer you this option. You must ask for it.
Unless you negotiate for more favourable terms up-front, the bank will expect you to cover their "loss" with fees or penalties. They've been counting on a specific number of interest payments of a specific dollar amount, and under a standard mortgage, you're on the hook for that. But this can be negotiated, and now's the time. If you ask, most lenders will consider waiving some or all penalties for prepayments (lump sum payments), early repayments, or doubling up on regular payments.
If you don't ask, don't expect them to offer you any breaks. But with a little insight into the mortgage process, you're prepared to ask the right questions. That's an educated approach to real estate.