Whether you’re getting your first mortgage, on your third mortgage renewal, or just trying to refinance or renegotiate your current mortgage, you’re going to need to bone up on your negotiation skills. Learning how to negotiate a mortgage can be helpful in securing the best loan for your new home.
Negotiating a mortgage is like the ultimate comparison shopping sprint. In a relatively short period of time, you need to collect, review and assess each lender’s offer in order to get the best deal. Stretch it too long, and your credit score could take a hit. Don’t do enough comparison shopping and you could be paying tens of thousands more for your home.
Here are six steps to help you negotiate the best mortgage deal.
#1: Know your score
A good credit score is key for buyers when it comes to getting the best mortgage rates, so the first step when negotiating any mortgage loan is to check your credit report.
Go to one of both credit bureaus, Equifax Canada and TransUnion Canada, to request a free credit report. This won’t show your score, but it will tell you what accounts are included in your consumer profile and whether or not there are any outstanding issues, such as an unpaid bill.
To get your credit score, you can pay a fee to either a credit bureau or an online service. Before paying, check your bank or credit union. Quite often, bigger financial institutions will provide customers with free access to their credit scores. There are also apps that give you access, just be sure you check their privacy and security before giving out personal information.
Your credit score will be a three-digit number between 300 and 900, with 650 considered an average score.
“Due to government regulations, a strong score is mandatory to get the best rate,” explains Robert McLister founder of Ratespy.com. “As a rough rule of thumb, you need at least a score between 680 to 720 to get the lowest rates — and your odds are even better when your score is above 750.”
>>For more on how credit scores are calculated and how this score impacts your house-buying options, read: How credit scores impact house buying
#2: Calculate your debt-service ratios
When negotiating a mortgage, lenders use two debt-to-income ratios to measure your ability to manage monthly payments: gross debt service ratio (GDS) and total debt service ratio (TDS).
GDS is calculated by adding your housing expenses (this includes: mortgage payments, property taxes and heating costs and if you’re buying a condo, 50% of your condo maintenance fees) and then dividing this by your annual income.
TDS is calculated by adding your housing expenses (listed above), then adding your credit card interest, car payments and loan expenses and dividing this by your annual income.
Smart personal finance guidelines suggest that your GDS should be no more than 32% and your TDS should be no more than 40%. However, if you have an exceptional credit score and reliable income, lenders will exceed these ratios, up to a maximum GDS of 39% and a maximum TDS of 44%. If your ratios are above this, you may find you don’t qualify for the best rates from A-lenders (big banks and mono-lenders) or you may be forced to seek out a loan from B-lenders (smaller trust companies and private lenders), who will charge you higher mortgage rates.
Found a low mortgage rate online? It’s difficult to get that great low mortgage rate if your debt load is too high.
— Robert McLister
Don’t want to do all this math? As a quick check you can always calculate your debt-to-income (DTI) ratio. DTI is a quick way to measure your ability to manage monthly payments. It’s calculated by dividing your total recurring monthly debt by your gross monthly income and expressed as a percentage.
For example, if your recurring monthly debt is $1,000, and your gross monthly income is $5,000, your DTI is 20%.
When negotiating a mortgage, it’s best to keep your DTI under 30%; the lower your debt-to-income ratio, the more likely you will get a better mortgage rate.
#3: Go online to comparison shop mortgage rates
There are hundreds of mono-lenders, banks, credit unions and private lenders in Canada competing to get your mortgage business. Comparison shopping for the best rate can feel almost insurmountable, unless you use the power of the Internet.
By going online, you can use comparison sites — known as mortgage aggregators — to shop for the best rates (and some even list the terms).
Online mortgage aggregators make it easier for you, since they collect rates from most lenders and provide this information in an easy-to-read format to mortgage shoppers.
“The best way to know if you’re getting a subpar deal is by comparison shopping,” said McLister. “The easiest way to do that is by using a rate comparison site or consulting a mortgage broker.”
The most popular mortgage rate comparison sites include Ratespy, RateHub, LowestRates, and RateSupermarket. The key is to pick a consolidator that shows a broad spectrum of lending rates.
“Consumers rely on rate sites, believing they compare numerous providers. But in reality, they’re only being exposed to a tiny fraction of the market,” says McLister. “The more providers you can compare, the better deal you’ll get.”
Better still, get strategic about how you use rate consolidator sites. McLister suggests using a three-step process to find the best mortgage rate:
1) Enter your mortgage type, amount, home value and province
2) Compare the lowest rates (be careful to read all the rate notes)
3) Contact the provider directly to confirm:
(a) if there’s any fine print, and
(b) if the rates apply to you.
Rate sites won’t help you if you don’t fit the conventional borrower profile: employed full-time, with a good credit score and low to no debt. For those with low credit scores, unstable income or self-employment or high debt, you’ll need to work with a mortgage broker or lender directly in order to get the best mortgage rates.
Remember, a “good” mortgage rate is not a precise number, but more of a subjective range.
In general, however, a “good rate” is a mortgage rate that is below the market average, when all factors are taken into consideration. The “best rate” would be the absolute best mortgage rate you can obtain given all the factors (such as debt ratios, income status and credit score, as well as the cost of the house and the size of your down payment). As McLister explains, “the best mortgage rate is the one with the highest probability of maximizing your net worth.”
#4: Talk to a mortgage broker
Shopping for the best mortgage rate is only the first step.
“It’s like asking what’s a reasonable price for a car,” says McLister. “Before getting an answer, first you must narrow down all the variables.”
In mortgages, these variables include term length, type of rate, fee cost, interest rates, and flexibility.
By talking to a mortgage broker, you can find out information that may not be transparent or easily understood. For example, does the lender charge you each time you change your mortgage payment frequency, do you need to pay for appraisal and discharge fees, and are there penalties for late payments and prepayment privileges?
It’s important to consider all the costs, says McLister, since hidden fees can really add up. Some lenders will offer a low mortgage rate, but charge a higher percentage of the loan amount as a processing fee, thereby increasing your overall borrowing costs. Other lenders will charge slightly higher rates, but low, low fees.
Then you’ll need to consider what type of mortgage will work best for you. Would you benefit from the flexibility of an open mortgage, or the better rates offered from a closed mortgage? Do you want the flexibility to convert a variable rate into a fixed-rate mortgage? Or perhaps you want to maximize prepayment privileges (to help pay down this debt faster) or get a mortgage that you can transfer from one property to another.
All of these variables are available in this competitive marketplace, but the process of comparing each option and the associated costs can get quite confusing. That’s when it’s best to talk to a professional.
As an independent mortgage broker with over a decade in the business, McLister explains that working with a licensed mortgage broker will help you compare deals from a variety of lenders in a quick, efficient and thorough way. There’s no downside to getting professional advice, since the lender, not the borrower, pays the fees to the mortgage broker. Just be sure to start working with a broker that understands your needs and has worked with borrowers, like yourself, in the past.
Remember, you can always chat with your bank’s mortgage advisor to find out the best they can offer, just remember that they only suite of products available to this advisor is what that bank has to offer.
#5: Lock-in your rate
Once you’ve negotiated a mortgage and as soon as you’ve found a mortgage that works best for you, lock-in the rate, term and conditions. This can be as simple as asking the mortgage lender or broker for an email listing the terms and rates or you may have to start a pre-approval application process to get a more formal guarantee.
For some lenders, a rate guarantee is not available. These lenders compete for borrowers by offering the lowest possible rate on bare-bones mortgages, but it also means they minimize any extraneous paperwork, such as pre-approvals. If this is the mortgage you’ve selected, consider locking-in a rate with your second best mortgage option, just to minimize the risk of near-future mortgage rate increases.
#6: Get your paperwork in order
Even if the application process seems straightforward, you need to know exactly what’s involved so there are no surprises. Begin by asking your lender or broker what paperwork will be required when you make the formal mortgage application. Then start collecting this documentation.
Also, ask whether or not you will be responsible for paying any third-party fees, such as an appraisal or legal fees.
Ask if you can use an online platform or digital process to upload documents and track your loan application process.
Finally, ask your lender or broker the average length of time it takes to get a mortgage application approved. This will give you an idea of when to start the application process, keeping in mind that you’ll want to leave yourself some extra time, in case you are not approved.
In the end, renegotiating a mortgage requires a combination of factors. You need a solid credit score, stable finances, and lots and lots of research. Once you’re able to negotiate a mortgage, you’ll certainly know you found the best loan for your new home.