11 February 2019

There’s an entire industry of smaller mortgage lenders and brokers who will never make the headlines. As a rule, they are as stable and reliable as the big ones, but they are also much more affordable. So why do we keep working with the big banks? Complacency and the lack of knowledge could be the main reasons.

There’s always a point in all unhealthy relationships, when you just have to say you’ve had enough and you leave. And if you’re not willing to keep financing the already profitable Big Six, it’s great time to stop doing it now.

There are, at least, two important reasons why you should leave your bank and choose one of the smaller lenders.

How do mortgage rates work? All lenders (big or small) lend money to homebuyers in the form of mortgages. Even big banks borrow money to provide the necessary mortgage products, and they get funds at a lower rate than the ones they offer borrowers, thus making a profit.

Starting last fall, the rates that lenders get when borrowing funds, have been falling. In November 2018, a five-year government of Canada bond cost lenders 2.5%, and now it’s as low as 1.75%. It’s a reflection of lending costs at the bond market, which affects fixed-rate mortgages. However, the big banks started dropping their rates only recently.

Smaller lenders and brokers began doing it in January – the time when the Big Six also should have done that. But no one wrote about in the headlines.

And even if we forget that the big banks were selfishly late with the rate declines, there are still no reasons to stay with them, because smaller lenders and brokers always offer mortgage rates that are much better than those posted by the Big Six.

Here’s a good example. RBC’s five-year fixed rate of 3.74% (mentioned in all the media) means a monthly payment of $2,560 on a $500,000 mortgage.

In case we take the same basic numbers ($500,000 mortgage, 25-year amortization period) and apply today’s best available five-year fixed-rate of 3.39%, the monthly payment will be $2,467.

It marks monthly savings of $93. Although it may sound not so big, keep in mind the 25-year amortization period. So, as a result, by leaving your bank, you will save $27,900. And, of course, don’t forget about the big banks’ higher penalty in case you decide to break your mortgage earlier.

In other words, Canadians just overpay by staying with their big banks. But we can change that. Make sure when you choose your mortgage product, that you don’t just take the first offer a bank gives you. Shop around and compare all the available options.

We do that when we book a plane ticket or a hotel, why not doing it when it comes to the most important financial decision of your life? Keep in mind that savings from a hotel room will be much, much smaller than the savings from your mortgage.