What you need to know
For whatever reason you’re thinking of switching, whether it be for a refinance or a renewal, there are a few things you should know before you make the decision to move to a different lender. To help with the preparatory work, I’ve included a few key details which will help you decide if it makes sense to even consider leaving your current mortgage holder. After you’ve done some preliminary research on your own, the next step is to contact a mortgage broker to explore what options are available for you.
Before switching to a new lender, you need to know what your existing one will charge you to leave. These are known as payout penalties. While most prime lenders charge the higher of one of two payout penalty options listed below, some non-prime lenders may also charge an additional payout fee which you hopefully are aware of from when you first took out the mortgage. An example may be an additional 1% cost on the remaining balance owing.
A payout penalty is charged when you pay off the mortgage principal prior to the renewal or maturity date or pay the mortgage principal down beyond the allowable prepayment privilege amount. The most common payout penalty calculations are the GREATER of 3 months interest or interest rate differential (IRD).
3 months interest– Amount currently owing on your mortgage x current interest rate charged divided by 365 x 90 days
Example – $300,000 x 5% divided by 365 x 90 days = $3,698.63 payout penalty
Interest rate differential– The IRD amount is calculated on the amount being repaid using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate the lender can now charge when re-lending the funds for the remaining term of the mortgage. This calculation is a bit harder to provide an example for. The best way to get a payout penalty estimate is to contact your existing lenders customer service department.
If there is sufficient equity in the property available, most borrowers will usually add their payout penalty to their new mortgage amount so they’re not paying that amount out of pocket.
In addition to potential payout penalties and fees, there could be other costs associated with setting up your new mortgage, including an appraisal fee and lawyer fees. On top of those, your existing lender will also most likely charge an administration fee or a re-investment fee for leaving them of approximately $200 -$300. You have a few options available to you to cover these costs; you can include them in your new mortgage amount, you can pay them out of pocket, or your new lender may cover those costs for you as an incentive to move your mortgage to them.
Your new mortgage lender will not have any information about you so you will be asked to re-qualify to show them you can afford the mortgage they’re about to give you. You will be asked for documentation to confirm your income and your credit report is ordered as well. If your financial situation has changed since the last time you got a mortgage, the document requirements could be different.
CRUNCH THE NUMBERS
If you are “refinancing” your home to access some unused equity, the guidelines are different than if you are simply “switching” your existing mortgage balance to a different lender, As you’re only able to “refinance” your home up to 80% of your home value, you need to make sure you have enough room in your new mortgage amount to cover all your existing mortgage costs if you don’t want to pay them out of pocket. If you are considering switching mortgage lenders only for a better interest rate, again, you need to determine if it is the right decision for you as it doesn’t come without some homework for you to do in satisfying the approval conditions of the new lender. Based on my experience, if your existing lender is advised you are considering leaving for a lower interest rate, they may then offer you their best rate to keep you with them as you won’t know what they’ll do to keep your business unless you ask them.
If you have decided switching to a different lender is the best decision for you, do work with an experienced professional you trust. Don’t be afraid to get a second opinion, ask your friends, your family or read the reviews online. Picking the proper professional to work with can save you thousands so don’t underestimate the value in prioritizing the people part of the process.