How to beat the best rate?
Almost everyone who calls me wonder the 7 magic words: ” Hello, what is your best rate ? “
I reply: “There is something more important than the best interest rates.”
Is this possible? Yes!
Here’s the explanation.
[ If you're in a hurry, I will immediately give the conclusion :
This article demonstrates that having the right strategy systematically mortgage is on average 20 times (no exaggeration) more important than simply choosing the best interest rates.]
How can we beat the best interest rate?
To answer this question, we must follow three steps:
- 1 – Understand the impact of better interest rates.
- 2 – Find other “thing” that can save you money, and
- 3 – Compare the savings of the “best rate” with the other options.
Step 1: The impact of better interest rate on your mortgage.
The best interest rates are reserved by banks to customers who have:
- Good Credit,
- good income
- a down payment.
Each lender (bank) has a better rate, but for us the best rate is the lowest it’s possible to have now from all lenders.
If you search for the best interest rate today (April 4, 2006) for each lender would be found:
The gap in better interest rate:
|The best 5 years fixed rate lender|
|Two insurance companies in Quebec||5.04%|
|Mortgage lender related with a major Canadian bank.||5.08%|
|A mortgage lender.||5.09%|
|3 large Canadian banks||5.10%|
|2 mortgage lenders.||5.15%|
|1 Bank average.||5.15%|
The gap between the best rate for all lenders (often an insurance company or a lender less well known) and lowest rates of the major chartered banks is 0.06% (5.10% – 5.04%).
Why the difference is so small ?
The advent of super-Brokers (Mortgage Intelligence, Muti-Loans, Invis …) and the Internet influence the competition between lenders.
They must be very vigilant and to stay competitive in the market.
What is the impact of 0.06% on a mortgage?
Compare a $ 100,000 mortgage amortized over 25 years with a rate of 5.10% and a rate of 5.04%.
|Mortgage of $ 100,000||Monthly payment||Interest over 25 years|
|Rate 5.10%||$ 587.31||$ 76,193.23|
|Rate 5.04%||$ 583.88||$ 75,165.23|
It’s a difference of $ 1,028 over 25 years or $ 41.12 per year.
The impact of higher rate compared with the best rates of the major Canadian chartered banks is $ 1,028 for a mortgage of 100,000 over 25 years.
Step 2: Find something else that can beat the interest rate
Dr. Milevski (University of York, Totonto) published a report in 2001  where he studied the savings generated by two mortgage strategies between 1950 and 2000.
Source: Milevsky, Moshe Arye PhD; Mortgage Financing: Floating Your Way to Prosperity ; IFID Center Research Report, 2001, p. 2.
An excerpt of the study: “During the period from 1950 to 2000, I believe that a consumer who has a mortgage of $ 100,000, which will be repaid over 15 years, have spent an average of $ 22,000 more in costs funding by borrowing and renewing a mortgage fixed rate of 5 years, that had he financed his mortgage base rate and renewed every year. Historically, 88% of the time, a consumer is better to borrow from the base rate, compared to a fixed rate of 5 years. In addition, [...], I believe the future probability of success to borrow at prime rate is approximately 65% and the average savings on a $ 100,000 mortgage is approximately $ 10,000. This text was translated not Gregory van Duyse.
He concluded that strategies had saved an average mortgage of $ 22,000 for a mortgage of 100,000 over 15 years compared to a mortgage 5 year fixed rate (the most common mortgage strategy in Quebec).
Although shown only 88% of the time it was better to use another strategy that Directory using the fixed rate for 5 years.
The real conclusion of the study is that it is crucial to choose the right strategy because choosing the wrong mortgage product could be very costly.
Step 3: Compare the savings of the “best rate” with that of a mortgage strategy.
The difference is clear.
A person who only shop the best rate will save $ 1,028 over 25 years while the average savings with a good strategy amounted to 22,000 mortgage over 15 years.
$ 22,000 ÷ $ 1,028 = 21.4 or mortgage strategy is 21 times more important than simply shopping rates.
Does that mean we should not have the best rate?
- choose the right mortgage strategy for you in today’s economy and subsequently
- find the lender who makes this strategy and finally
- the best rate for this strategy.
Have the best interest rate for your mortgage with a bad mortgage strategy will cost much more than having the right strategy and a very good rate!