Banks Don't Always Give You Their Best Rate When Converting a Variable Rate Mortgage!

 

 
Home buyers often purchase a variable rate mortgages because they offer significant savings over fixed rate mortgages - the difference being anywhere from 1% - 1.25%. The idea is to purchase the variable rate mortgage in a downward interest cycle with the option of switching to a fixed rate mortgage just before interest rates start rising. This sounds like a great money saving tactic; but buyer beware! There are things that the big banks and credit unions are probably not telling you.
 
Banks offer great variable rates initially, but when you decide to lock into a fixed rate, you may find yourself at a disadvantage.  Contrary to what buyers believe, many banks have no obligation to give you their prime market rate.   Many bank agreements do not state in the contract that you will receive their "best rate." Instead, at conversion, they only offer a "posted" rate or a slight discount off the posted rate. Because of this, buyers get caught in a situation where they end up paying more interest than they need to, ultimately losing money.
 
What is the monetary difference on an average mortgage based on these facts? Let's say look at a situation where a buyer has a $250,000 mortgage with a 25-year amortization. They have a  five year variable rate mortgage and decide to lock in after one year.  Converting to a fixed rate mortgage after one year, at .25% higher than the best market rate equals $625 per year in additional interest costs.  Over four years the buyer is paying an extra $2500 in interest. Over 25 years that amounts to $15,625!
 
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 they don't know is that the big institutions and credit unions have NO incentive or obligation to do so.  In fact, they have more incentive to treat new clients better than existing ones. Once an existing client signs the agreement, the mortgage is already a done deal; that client is essentially locked in. If the existing client wants to convert, the bank can offer the client whatever they want. If the existing client decides to leave, they are charged a penalty. It's a win-win situation - but only for the banks. And you, as the client, are left paying more in the end.
 
How do you prevent this? Do your research either before entering an agreement, or when renewing your agreement. Make sure that your agreement has that crucial clause in the contract that states the "Client will get best rate upon conversion to a fixed-rate mortgage."  Many mortgage brokers work with lenders (like ING, First National, MCAP and Merix) who are willing to make a commitment in writing offering their clients their best rate whenever they choose to lock into a fixed rate mortgage. Even knowing this, some brokers still offer variable mortgages from the Big banks purely because of brand recognition.
 
When you do business with the Averbach Mortgage team, we make sure you understand the fine print. We make sure that a mortgage is truly in YOUR best interest. Unless otherwise requested, we set you up with a variable rate mortgage offering the best available fixed-rate at conversion.
 
Be sure to contact us with ANY questions you have about variable and fixed-rate mortgages.  This is our business, we know it inside and out, and are here to help YOU get the best deal you can.