Are you interested in saving money on your mortgage renewal? Then this post is for you.
Every month, I hold Office Hours for my Women’s Money Group members. These are “ask me anything about money” sessions. I got a great question from one of my members (let’s call her Leslie) during the most recent session: What to do about a mortgage renewal?
A summary of Leslie’s situation:
- The mortgage on her home is coming up for renewal in the next few months, therefore the early renewal window is open.
- In addition to the mortgage, Leslie has a couple of Home Equity Lines of Credit against the house.
- Since transitioning from salaried to commissioned work, Leslie is concerned about stability.
- Her credit score is excellent.
- Leslie has multiple credit instruments, in addition to the mortgage, with one bank, with whom she’s been dealing for years.
- She has significant corrosive debt, which is her current focal point. Her goal is to eliminate this debt as quickly as possible.
At the end of her explanation, Leslie added the following:
After reading your blog posts on mortgage types and portability, it looks like my original mortgage is a standard charge mortgage with collateral mortgages on the HELOC’s since then. I’m not sure I can shop around and port my mortgage to another provider without paying off the HELOC balance. If this is true, how does it impact my ability to negotiate a better rate?
I have a number of products with [Bank X]. To be honest, I like their online platform and the ease of banking and I feel beholden to this bank. I know I shouldn’t but I’m putting it all out there! This shouldn’t be the basis for a financial decision, I know. I need things to be easy in an already complicated life.
Really looking forward to your guidance on this. I feel like this is a natural opportunity to ‘clean things up’ so to speak, and reset the next 5 years toward a more productive and healthy financial future!
The bottom line is that Leslie isn’t sure a) how she should approach the whole business of negotiating her mortgage renewal given all the moving parts; and b) whether she has any leverage at all given the extent of her debt. She also feels tied to her current bank.
Here’s how I unpacked this and the suggestions I made to Leslie.
#1 – Start with Your Mindset
All financial decisions, particularly ones that involve negotiation, start with the same first step: a mindset check-in. What assumptions are you bringing to the table that could influence you negatively? How are you approaching the situation – as a problem or an opportunity? Are you giving your power and your control away before even opening your mouth?
The way you frame your circumstances will affect your outcome.
After a bit of back and forth with Leslie, it became apparent that she didn’t feel she had much choice; so we talked about mindset.
Start by reminding yourself that you are in the driver’s seat. Seldom is it the case that you only have one road available to you to reach your destination. You can choose other paths if you like. The trick is to start by writing out your goal: What are you trying to accomplish? What would be the best possible outcome for you?
In Leslie’s case, it would be ideal if Bank X offered her an attractive rate that would mean minimal extra work for her (i.e. not having to go through the effort of finding another lender) at a time in her life when she is juggling many balls at once. A low rate would also free up more cash that could then be used to pay down expensive debt more quickly.
Confidence is key
Once you’re clear on your desired outcome, then enter into negotiations from a position of confidence and curiosity. What’s out there? What options do you have at your disposal? Perhaps Bank X is the best choice; maybe not. The only way you will find out is by asking from a position of calm confidence.
If you find that you’re doubting yourself, use positive scripts to help shift your mindset. Here are a few examples:
“I am in control of my financial life.”
“I am in the driver’s seat of my financial life. The choice is mine.”
“I find products and offerings that are the best fit for my needs.”
Keep repeating these to yourself, especially during moments of self-doubt.
#2 – What’s the very best rate you can offer me?
One of the questions Leslie had for me revolved around whether or not she should consolidate her lines of credit into her mortgage at renewal. We discussed the pros and cons of doing that. There were clear risks and rewards in her case. The details are outside the scope of this post, so I’ll leave that discussion for another day. Today, we will focus solely on the existing mortgage renewal.
Baseline information
Once Leslie determined her ideal outcome, it was time to get some baseline information. Before wondering if it’s possible to port the mortgage (a moot point in her case since the term is coming to an end within a few months) and whether she has other options available to her, it was important to determine what’s on offer with her existing lender.
To help her out, we did a simulated call together in which I played her, calling up her contact at the bank, to ask about the renewal:
Hi Ms Banker, it’s Leslie. I’m calling about my mortgage renewal. Is now a good time to discuss that? Great!As you know, my mortgage term is coming to an end in a few months and I’m starting to do some homework to determine what’s available on the market. I’ve been with your bank for many years now and have appreciated the great service you’ve given me. I’d love to renew with you, but I do need to ensure that I get the best possible deal for my family. We are working on eliminating our debt, so every dollar matters.I’m probably looking for another five-year term, but I’m also curious about three- and four-year rates. What’s the very best rate you can offer me?
That’s it. Once you’ve made it clear that ideally you’d like to stay, but you are definitely shopping around, and you’ve asked for the best they can offer you, don’t say another word. Resist the urge to fill the void.
Silence is a powerful negotiating tool.
Let the bank come back to you with its offering. Once you have those rates in hand, you’re in a position to figure out next steps.
If the rates look high in comparison to others you’ve seen on the market, then go back to your banker with this simple question, “Is that the best you can offer me?” You might also add that Bank Y is offering better rates. It pays to do your homework. I recommend having a conversation with the mortgage agent who got you the mortgage in the first place. She/he may well have better options available for you.
Several days after our conversation, I received an email from Leslie telling me that the bank had come back with excellent rates – there was no need to move. She used the freed-up cash to increase her mortgage payments, which, in conjunction with bi-weekly payments, shaved seven years off her amortization. How cool is that! In real dollars, she will save approximately $30,000 in interest payments.
Now that’s time well spent. Cue the mariachi band!!
#3 – There is no loyalty in banking
Warning bells went off in my brain when I heard Leslie say she feels beholden to the bank.
The bank is not your friend. It’s nobody’s friend. This isn’t an emotional comment; it’s a pragmatic one.
Banks/lenders are service providers. They lend money, hold money, etc. They are handsomely paid for those services. That’s the full extent of it.
There are very good people who work in those institutions, but a) there is so much turnover in banks that you rarely deal with the same person for any length of time; and b) the bank’s employees are bound by the rules of the institution they work for. It’s not about loyalty.
Banks are in business to make money for their shareholders. If you follow their rules, they continue to provide service to you. If not, they will go after you to collect or they will deny service.
Do not for a second feel beholden to any bank. If they provide good service and products, then stay with them. If they do not, move your money and your business elsewhere. The only question to ask yourself is the following: “Is the bank serving me well?”
One last note on the best approach for renewal: never, ever, evereverever just sign back the renewal forms that the banks sends you a few months before your mortgage is do. What’s the old saying – there are only two certainties in life: death and taxes? Well I can add a third to that: renewals are *never* the best a lender can do. Consider that the opening gambit in the negotiation.
Strategy to save on interest costs
You’ve already seen how Leslie is saving $30,000 in interest costs. I took a similar approach for one of my rental properties whose mortgage is coming up for renewal in a few months.
I had pretty much the same conversation with my banker as the one I demonstrated to Leslie. One of the benefits of the current market is that the rates are the lowest I’ve ever seen them in fifteen years of owning properties. Here’s what I was quoted:
1 Year- 2.49%
2 Year- 1.87%
3 Year- 1.87%
4 Year- 1.92%
5 Year-1.97%
Since the rates above are quite a bit lower than the rate I had been paying, I asked our banker to renew for five years at 1.97% while maintaining our existing mortgage payment. That means that with every mortgage payment, we will be attacking the outstanding principal much more quickly than if we had simply reduced our mortgage payment to reflect the lower interest rate.
Why didn’t I go with the lowest rate?
I know a lot of people who choose the lowest rate, regardless of the term. Since I have more than five years’ of payments left on this mortgage, I’m interested in maximizing the low rates for as long as I can.
There is a whopping ten basis points of difference between 1.87% and 1.97%. That amounts to a difference $5/month or $60/year in mortgage payments. Peanuts, compared to the benefit of having a mortgage rate that is less than 2% for an additional year.
What did it do for us? It reduced our amortization from 208 months (17+ years) down to 84 months (7 years). In other words, we shaved ten years of mortgage payments and thousands of dollars in interest costs with this one move alone.
We feel comfortable doing this because this mortgage is for a rental property that has good cash flow. We also have a strong cash buffer in the property’s account in case the tenants leave.
Here something to think about if you’re considering doing this for your home mortgage: how reliable is your cash flow? If your income is uncertain because of Covid, this might not be a great move. If you can swing it, though, this is a powerful strategy to save a bundle of money, as Leslie has discovered.
Evaluate your risk and go from there.
The value of asking questions
What Leslie’s story illustrates is that it pays to take the time to carefully consider your situation, ask questions, and take action. A few strategic actions can yield immense savings and peace of mind.
If you would benefit from having access to my Office Hours for all your money question, join us! Our Women’s Money Group is growing. This month’s Office Hours are scheduled for September 15th and 23rd.
What money question would you ask if you had a safe, no shame, no blame, no judgment space in which to do so?
And what would you do with $30,000 extra because of a wise financial choice?
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3 Responses
Great article Doris, thank you so much.
I do have 2 questions:
1. “port the mortgage”- What does this mean?
2. “It reduced our amortization from 208 months” – I don’t get it. Why did it reduce your amortization?)
I hope you don’t think I am asking dumb questions. At least you know I do read your articles. (LOL) 😊
Hi Pamela,
Great questions. Btw, in my world, there’s no such thing as a dumb money question! Ask away.
The answers to your Q’s:
1. Porting a mortgage means taking your current mortgage, with its term and rate, to another lender. This is something that you might consider if you’re buying a new home part way through your mortgage term and you want to keep your existing rate/term while changing lender and/or you want to avoid prepayment penalties for paying out your loan early.
If you need to borrow additional funds because the house you’re purchasing is more expensive, then the new lender would typically give you a blended rate (i.e. old rate for existing loan + new rate for additional borrowed funds). Not all mortgages allow porting. You need to check with your lender to see what’s possible.
2. In the example that I shared, my amortization was drastically reduced because I cranked up the amount of principal that I’m paying off every month. Our previous amortization only required a mortgage payment of $X to stay on track. However, I bumped up the mortgage payment significantly by maintaining the amount I had been paying. All those extra dollars go straight to principal repayment, which means that my loan will be paid off many years sooner as a result.
I hope this helps. If not, ask more questions! Thanks again for popping in.
It does, it makes complete sense. Thank you. 🙂