Bargaining on your mortgage can save you a bundle!

February 5, 2003 -

A couple of recent surveys show that, despite changes to the system in the past few years, most Canadians still don't get it when it comes to mortgages.

The first was a study by Canadian mortgage brokers that reveals an astonishing 84% of consumers do not bother bargaining vigorously for the best deal when getting or renewing mortgages, opting instead to stick with their existing lender.

Most lenders offer the posted rate, which any banker will admit can be haggled down by at least a percentage point, and sometimes more. This percentage point is significant because over the life of a mortgage, it can add thousands of dollars to the cost -- about $13,000 more per $100,000 borrowed for a 25-year amortization schedule.

A study by Toronto Dominion Bank shows mortgage debt accounted for 71% of Canadians' personal disposable income last year. Regional differences meant in Ontario, mortgage debt accounts for 75% of consumers' personal disposable income, putting the province second among the mortgage indebted. The leader, British Columbia, has the highest housing prices in the country, and clocked in with mortgage debt at a whopping 112% of disposable income.

This study was probably skewed by the recent home-buying frenzy that has swept Canada -- which means many homeowners are still in the early, most debt-heavy, stages of their mortgages.

However, advisors say the two studies combined indicate, despite significant changes in the mortgage market, most Canadians continue to view high housing debt the same way they always have -- as one of life's unfortunate inevitabilities.

They are paying dearly for this lack of interest. The Canadian mortgage market is worth about $80-billion a year, so even a 5% drop would be significant. It is no surprise lenders are not exactly shouting better debt-paydown techniques from the rooftops.

Advisors say, since the mortgage market opened up and began offering more options, proactive mortgage holders have been handed more opportunities to reduce their debt burdens.

The simplest option is to shop around and bargain over the rate offered, as suggested by mortgage brokers in their study.

Another method is to increase frequency and size of payments, usually in tandem with wage increases or any extra money. By paying every two weeks instead of monthly, mortgage holders can knock almost seven years off a 25-year mortgage and save tens of thousands of dollars in interest.

More sophisticated techniques grow out of an understanding of how mortgages work. There are four factors: interest rate, time (or amortization period), frequency of payment and size of payment. Most people, hoping to keep their payments low and manage cash flow, focus on the interest rate first, and then predictability second. That is why the majority of mortgage holders opt for locked-in five-year terms, which usually cost more, but offer a guaranteed and predictable schedule of payments.

However, if homeowners could see the system as a whole, they would realize it can be manipulated to give more options.

For example, the best way to quickly reduce a mortgage debt is to get a variable-rate mortgage, which usually carries the lowest rate, and pay it as frequently as possible. Add pre-payment options, and the mortgage debt falls even faster.

Lastly, reducing the amortization period also enhances early payback, facilitating quicker debt reduction.

A wrinkle on this technique essentially reverses the process to take into account the more changeable nature of work today. It treats a mortgage like a line of credit with the homeowner getting the longest amortization period available, with the lowest rate possible, and the most liberal and flexible pre-payment options.

This way, when the homeowner has high income, he or she can pay large amounts on the mortgage, but can revert to the lowest payment when income is lower. Because most people are generally up more than they are down, this has the same long-term effect as the previous method.

Both methods can be manipulated to take into account any of the four mortgage factors, allowing far more flexibility. For example, the interest rate is not as important as on a fixed schedule because the mortgage holder can always make up the difference with extra payments, or more frequent payback.

Similarly, each part of the equation can be enhanced to make up for a shortfall in some other part.