“Am I better off with a big bank for my mortgage?”
This is a question that is frequently asked by property buyers when it comes to choosing a mortgage lender.
The answer, however, is very subjective as things like mortgage servicing, access to products and penalty calculations have to be considered when picking the best lender for your mortgage.
Do you need a branch?
One advantage that big banks offer over smaller mortgage lenders (monoline lenders) are the “bricks and mortar” branches. Some people prefer to have a face-to-face conversation with a bank representative when servicing or making changes to their accounts.
Something to keep in mind is that once people get their mortgage, they make their payments like they are suppose to and return to the bank only when the mortgage is up for maturity. Thus, never really utilizing the “face-to-face” experience they thought they would need.
Smaller lenders do not offer face-to-face experiences for clients. However, most smaller lenders provide online access to mortgage features such as pre-payments, changes in payment schedules, and remaining balance, that you would otherwise utilize a big bank branch to access.
Thus, consider if you are looking for fast access to information, simplicity and how hands-on you’d like to be with your mortgage when choosing a service level.
This is something that many home buyers don’t consider as most are focused on getting a good rate or long-term, when it comes to their mortgage.
Most banks have a portability clause that will let you transfer a mortgage over to another property if you decide to move. This comes with restrictions that vary between lenders, big and small. In the event that you cannot or do not want to port, it is important to understand how penalties are calculated.
With variable rates, the norm is three months’ worth of interest. There are some lenders that will reduce their interest rate by 0.10%-0.20% (on average) but will charge 3% of the balance as a penalty if contract is broken. For people who are planning on staying in their new home for at least the next five years, this is a great option. This is because the lender will let you convert to a fixed rate mortgage without any penalties and will also normalize the penalty if you decide to refinance with them given their clients some more options while saving on interest costs.
When it comes to fixed rate mortgages, penalties are calculated in one of two ways, whichever of the two is greatest.
The first is the three months’ interest and the second is an interest rate differential (IRD) calculation that will determine how much interest the lender is loosing by letting someone break the contract. The lenders do this by using the current balance, time left in term and the interest rate for the closest term to what is left (to compare what they would have to lend it out to).
What big banks do that most smaller ones don’t, is use their posted rates as oppose to the best rates to calculate this penalty. Believe it or not, this can easily add an enormous cost to breaking your mortgage.
Most big banks will provide access to a secured line of credit against your home, assuming you qualify and that there is enough equity in your home to being with. This may, later on, save you thousands if you decide to renovate, invest, pay down high interest debt, etc.
Most smaller lenders do not offer access to secured line of credits, or have options for bank accounts/investments to keep them all under “one umbrella”. Over the last little while, this product offering has been shifting, however.
The ability to keep all mortgage and financial dealings in one place is something that matters to some but not to others.
Big banks may offer special terms to attract new business on case-by-case basis. They look to manage and balance their portfolio with other business lines within the same bank.
Small lenders only lend out and do not have other business lines to worry about. Because of this they have to be very competitive with rates in order to generate business and they are also very competitive at time of renewal.
This has really no bearing whether you are a big or a small lender. However, I’m a believer that:
Features vary from bank to bank, even the big ones, and it’s important to know how they will affect you.
Some lenders will let you pre-pay at any time, saving you the interest cost compounded over the amortization of your loan. Other lenders, will only let you pre-pay on your anniversary date. For example, if a day after your funding day or anniversary date, you got a bonus and wanted to pre-pay your mortgage, you wouldn’t be able to. You literally would have to wait 364 days in order to make the pre-payment thus costing you 364 days of unnecessary interest.
Another feature that needs to be considered is the maximum amortization. Yes, 35 years is still available for some borrowers. And no, not all banks will force you to take a collateral charge as oppose to a standard charge (even within the big banks).
Which is best for you?
I encourage everyone looking to buy, refinance or renew their mortgage to focus on both the short and long term goals. Ensure that the lender you choose will not impede on these goals and if they do, then they’re not the right fit for you.
The best mortgage is the one that lets you sleep at night, as it is very subjective in nature.