The process of buying a home can be chaotic. For example, suppose you’re in the process of making an offer or securing a mortgage on your conditionally accepted home. In that case, it might be tempting to skip the process of negotiating your mortgage rate and simply go to your local bank branch to apply for a mortgage. While negotiating your mortgage rate might seem like a small step you can skip to streamline your home-buying process, that is a mistake. Not negotiating your mortgage rate could make you tens of thousands of dollars poorer over the life of your mortgage.
Can You Negotiate a Mortgage Rate?
Negotiating a mortgage is not only possible but important. There’s often room for discussion, much like when you’re negotiating a salary increase at work. Start by researching current interest rates and understanding your credit score, as these factors can influence your negotiating power.
From there, gather information on competing lenders and their offers to leverage in your discussions. Don’t hesitate to engage with your current lender and express your willingness to explore other options.
Remember, a strong financial profile and a clear understanding of market conditions can empower you in negotiating terms such as interest rates, loan duration, or closing costs. Approach the process confidently, and be prepared to communicate your needs and priorities to find a mortgage solution that works for you. Remember that each negotiation is unique, so be open to compromise while striving for terms that align with your financial goals.
How to Negotiate Your Mortgage
There is a variety of tools and tricks you can use to negotiate your mortgage. And it’s important that you consider all of these tactics.
1. Have Your Documents Ready to Go
The key to putting your best foot forward when negotiating your mortgage rate in Canada is having all your financial ducks in a row. That means providing your lender with all the information they need regarding your income (including any side hustles), savings, and debt. Here is a list of documentation you should provide:
- Proof of employment and salary
- T4s showing proof of business or rental income (if any)
- Financial statements showing 90 days of account balances for any savings accounts
- Proof of debts and their current balances
- Your partner’s information if you are jointly applying for a mortgage
Providing this documentation will remove any opportunity for your lender to give you a higher rate based on missing information.
2. Strengthen Your Mortgage Application
The strongest mortgage applications get the best rates, so creating the best financial profile for your lender is essential. Here are some strategies you can use to strengthen your finances and, therefore, your mortgage application:
- Decrease debt – fewer debt obligations mean you can devote more of your income to paying your mortgage payments, which will improve your mortgage affordability and help you qualify for the best mortgage rate
- Improve your credit score – your credit score is a crucial predictor of what mortgage rate you’ll receive. Improve your credit score by making regular payments on your debts, maintaining a good credit mix, and never carrying more than 30% of your overall limit.
- Increase your down payment – a larger down payment makes you a stronger borrower. However, this tip has a caveat: Down payments larger than 20% often don’t qualify for the best mortgage rates because they aren’t insured by mortgage default insurance.
A robust mortgage application and a solid financial profile will give you leeway to negotiate with your lender, particularly because you can leverage other offers.
3. Be Aware of Current Interest Rates
Arming yourself with information is an excellent way to keep a cool head while negotiating. Find out the norm for mortgages in your current market, and use that information to push back if your lender offers you a rate that is too high. Ask friends and family members who recently purchased homes what mortgage rates they got, and take note of the terms and whether their mortgage was fixed or variable.
Beyond friends and family, check in with online forums local to your province. Finally, there are mortgage rate comparison websites reporting the lowest rates from the major banks and other lenders.
4. Shop Around Using a Mortgage Broker
When negotiating your mortgage rate in Canada, shopping around for the best rate is critical. If you only apply for a mortgage through your primary bank, the odds are you won’t get the best rate available. If you work with a mortgage broker, they can shop your application around to lenders and find the best rate.
Working with a mortgage broker doesn’t cost you anything because they get paid by the lender. You’ll only need to submit one application and authorize one credit check. Mortgage brokers also get volume discounts from their lenders, so their rates are lower than those you could negotiate.
If you prefer to borrow from your primary bank, a mortgage broker can give you leverage by lining up a competing offer.
5. Negotiate Add-Ons Like Prepayment Privileges
Negotiating your mortgage isn’t just about the interest rate. Mortgages also come with additional features that help you pay off your mortgage ahead of schedule. These features are called prepayment privileges.
There are two common types of prepayment privileges: lump-sum yearly payments and increasing your regular payments by a certain percentage. For example, your lender may offer you 10/10 prepayment privileges, meaning you can prepay 10% of your balance once per year and increase your monthly payment by 10%. Of course, you may wish to negotiate for better prepayment privileges, like 20/20.
Some lenders also offer additional options like Skip a Payment and home equity lines of credit. If those options interest you, consider negotiating to add them to your mortgage as well.
Why Negotiate Mortgage Rates in Canada?
Negotiating your mortgage isn’t just about getting a lower interest rate. It’s about what that lower interest rate will provide. Negotiating a lower interest rate means your mortgage will be less expensive to maintain, but how much less? Let’s look at an example.
Let’s imagine you’ve secured a home with an accepted offer at a purchase price of $600,000, accompanied by a $100,000 down payment. Your mortgage amount is $500,000, plus $14,000 in mortgage default insurance premiums, making the total mortgage requirement $514,000.
If you opt for a closed five-year fixed-term mortgage at the posted rate, you’ll be facing a 5.54% interest rate. This results in a monthly mortgage payment of $3,055, with a total interest payment of $149,889 over the five-year term.
However, if you negotiate your mortgage, explore other providers, and secure today’s best mortgage rate of 4%, your monthly mortgage payment will be reduced to $2,448. This represents a difference of $607 per month or $7,284 per year. Additionally, you’ll pay $102,000 in interest over the five-year term, a notable difference of $47,889.
To emphasize the impact of negotiating your mortgage rate, consider this: if you were to invest the savings from the lower monthly payments in a balanced investment portfolio earning 6%, you could accumulate an additional $46,446 by the end of the five-year term.
Negotiating Mortgage Rates is Worthwhile
While it’s tempting to avoid negotiating mortgage rates in Canada during the hectic process of buying a home, this is a mistake. Negotiating your mortgage rate is as important as negotiating the price of your house. To get the upper hand with your negotiation, make sure to prepare your documents, do your research, and shop around.
