Buyer Beware: Converting A Variable Rate May Cost More At A Bank

by The Averbach Mortgages Team

Home buyers, especially first time home buyers, often purchase a variable rate mortgage because of the significant savings over fixed rate mortgages. Depending upon the market, the difference between an initial rate on a variable rate mortgage and a fixed rate can range from 1 to 1.25 percent. That’s a significant savings, whether you are a first time homebuyer or purchasing your third or fourth home.

It’s a great idea to purchase a variable rate mortgage when you expect rates to decline in the future. When you do sign for a variable or adjustable rate mortgage, be sure there is an option to convert to fixed rate in a downward interest cycle. It is tricky to switch to a fixed rate mortgage just before interest rates start rising. How can you be sure you’ve timed your decision correctly? How will you know you are receiving the best financial advice? How can you be sure you are receiving the most competitive fixed rate loan? The answer to those questions: Call Averbach Mortgages.

Mike Averbach of Averbach Mortgages cautions, ‘Buyer Beware: Banks may cost you when converting a variable rate mortgage.’ Banks and credit unions may offer great variable rates initially, but when you decide to lock into a fixed rate, you may find yourself at a disadvantage. There are mortgage options that the big banks and credit unions are probably not telling you about.

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 consider a typical situation based on a buyer having a $250,000 mortgage with a 25-year amortization. They have a five year variable rate mortgage and decide they want to lock in after one year. How much does the borrower stand to lose? 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 be paying an extra $2500 in interest. Even more astonishing is the fact that over the remaining 25 years that amount adds up to $15,625.

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.

Once you sign the loan agreement, as an existing client, the mortgage is already a done deal; you are essentially locked in for the life of the loan. If you want to convert to a fixed rate mortgage, the bank can offer you their posted rate – NOT necessarily their best rate. If you decide to finance a new mortgage loan through another lender, the bank will very likely charge you a substantial penalty for paying off the mortgage early. It’s a win-win situation for the bank. You are left paying more than you need to and the bank wins either way.

How do you prevent paying too much? Make sure that your mortgage agreement has that crucial clause that states the ‘Client will get the best available 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.

Mike Averbach, Accredited Mortgage Professional at Averbach Mortgages, can be contacted via email at mike@averbachmortgages.com or by phone at 604-710-2550. Averbach Mortgages’ Mortgage Manager, Justin Blacklock, can be reached via email: justin@averbachmortgages.com or at 604-707-6339. Justin, Mike and the entire Averbach Mortgages Team will explain the fine print in mortgage loan documents. They will help you chose a mortgage that truly reflects your situation and respects your best interest.

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