Buyer Beware: Banks May Cost You When Converting a Variable Rate
To be sure you have access to the most current, most accurate mortgage rate information in Vancouver, BC, or anywhere else in Canada, you need the expertise of mortgage brokers like those at Averbach Mortgages. Their experienced and dedicated staff offers a full range of services and products for home buyers.
Averbach’s mortgage commitment comes with a clause that guarantees the best discounted fixed rate mortgage upon conversion. In order to honor this guarantee, Mike Averbach, Justin Blacklock, Mortgage Manager, and the Averbach Mortgages team typically works with clients at least 4 months ahead of time to ensure that you understand the market thoroughly and that you receive the best rate available.
Mike Averbach of Averbach Mortgages cautions, ‘Converting your variable rate mortgage may cost more at a bank.’ The initial rates offered at a bank or credit union may be very competitive. Later, when you decide to lock in to a fixed rate, you may find yourself at a disadvantage. As a consumer, acting on your own behalf, you probably won’t be told by the big banks and credit union about all the options that are available.
There are things that the big 5 banks (TD, BMO, CIBC, Scotiabank, RBC) and credit unions might not be telling you. Contrary to what buyers believe, many banks have no obligation to give you the prime market rate. Many bank agreements do not state in the contract that you will receive the best rate available. Instead, at conversion, they only offer a ‘posted’ rate or a slight discount (maximum 1 percent) off the posted rate. Because of this, buyers get caught in a situation where they lose money by not being unable to fix their mortgage at the prime rate.
Let’s examine a situation where a buyer has a $250,000 mortgage with a 25-year amortization. They have a five year variable rate mortgage and decide to lock in after one year. Converting to a fixed rate mortgage after one year at .25 percent higher than the best market rate equals $625 per year in additional interest costs. Over four years the buyer will pay an extra $2500 in interest. Over 25 years that amounts to $15,625. If you could save even a portion of that amount, isn’t it worth at least a phone call to Averbach Mortgages?
Mike Averbach says, ‘Buyers falsely assume that their big bank will treat them fairly or give them a better discount because of their long-term customer status.’ What buyers don’t know is that the big institutions and credit unions have NO incentive or obligation to give you their best rate. In fact, they have more incentive to treat new clients better than existing ones.
As an existing client, once you sign the agreement, the mortgage is already a done deal; you are essentially locked in. If you want to convert, the bank can offer you their posted rate - NOT necessarily their best rate. If you, the client, decide to seek financing elsewhere you will probably be charged a penalty. It’s a win-win situation for the bank. You, however, are left paying more in the end.
How do you prevent paying too much? Do your research either before entering a borrowing agreement, or when renewing your mortgage agreement. Make sure that your agreement has that crucial clause in the contract, ‘Client will be offered best rate upon conversion to a fixed-rate mortgage.’
Many mortgage brokers (like ING, First National, MCAP and Merix) do not have posted rates, and have a commitment in writing that offers clients the best rate if they choose to lock into a fixed rate at their particular lending institution. Even knowing this, many brokers still offer variable mortgages from the Big 5 banks purely for brand recognition to the client.
Don’t take a chance regarding one of the biggest financial decisions you’ll ever make. Call Mike Averbach at 604-710-2550 or email him: mike@averbachmortgages.com. Justin Blacklock can be reached at 604-736-1855 and by email: justin@averbachmortgages.com. Mike, Justin and the entire Averbach Mortgages team are available at your convenience. Call them today.
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