5 Steps to Negotiate a Mortgage
– Step 1: Let the lender make an offer
– Step 2: Negotiate prepayment penalties
– Step 3: Negotiate the rate
– Step 4: Negotiate the maturity schedule
– Step 5: Negotiate loan insurance
As competition is extreme in the field of real estate financing, it is not only possible to negotiate your real estate loan, but it is also strongly recommended to do so, as even 0.2% gain on loan can mean two tens of thousands of dollars of savings.
Negotiating a real estate loan revolves around 4 axes:
- Prepayment penalties
- The nature of the rate
- The modularity of the maturities
- The borrowers’ insurance
Step 1. Let the lender make an offer
It is imperative not to lower your cards first but let the lender make a rate proposal first.
Then the borrower can make a counteroffer, taking into account the following 4 elements.
Step 2. Negotiate prepayment penalties
They represent compensation intended for the lender when the borrower pays his real estate loan before the end initially envisaged. They are capped at 3% of the outstanding principal or the sum of the 6 months of interest to come, whichever is lower.
It is possible to negotiate the penalties for early repayment of the loan.
– If the borrower intends to resell the property in 7 years, they should write into the contract that the penalties will no longer be applied after 7 years.
On the other hand, if the borrower intends to keep the property, they should take advantage of the opportunity to propose to the lender that the penalties be extended to reduce the rate initially proposed.
Step 3. Negotiate the rate
There are three types of rates:
Fixed is the one most known to the general public; it does not move during the entire duration of the loan and is recommended if the borrower does not intend to resell.
– Variable: it varies up or down while remaining within a defined range. There are no prepayment penalties with a variable rate, so it is recommended if the borrower intends to resell in the short or medium term.
– Mixed or hybrid: it includes a fixed and a variable part.
Here again, it is possible to negotiate the nature of the rate of your real estate loan:
– If one chooses the variable rate, the lender must grant an entry rate lower than the average of the market of the fixed rates; it is what one names the “call rate”. The longer the review period, the more the borrower will benefit from this advantageous rate.
– The same rule applies in the case of a mixed or hybrid rate: the borrower must request that the fixed portion have a rate below the market average, as a call rate.
Good to know: certain precautions must be taken to control a variable rate, notably by imposing a maximum increase.
Step 4. Negotiate the modularity of payments
Quite simply, the contract can stipulate that the borrower has the right to increase the number of his monthly payments to reduce the repayment period and, therefore, the operation’s cost.
The fact that a client decides to increase the number of his repayments is a handicap for the lender because it leads to an inevitable loss of earnings in the long term. If the lender only grants small modularity, the borrower must ask him to make an effort on the rate.
Step 5. Negotiate the borrowers’ insurance
Any real estate loan must be insured if a situation puts the borrower in a position of difficulty of payment: death, total and irreversible loss of autonomy, total temporary disability, total permanent disability, temporary partial disability, partial permanent disability.
Please note: borrowers’ insurances are not mandatory, but the lender will refuse to grant financing if a certain number of them are not subscribed.
Negotiating the borrowers’ insurance for one’s home loan is the most subtle part because:
– the lender offers insurances in its catalogue, and the customer adviser receives a commission for each internal insurance taken out;
– However, the so-called “external” insurances to the lenders are generally less expensive;
– the lender does not have the right to refuse an external insurance policy as long as it offers the same level of coverage as the group insurance policy it offers, but it has the right to charge the rate it wants.
Therefore, the borrower must first find external insurance cheaper than the one offered by the lender and then come back to ask him to make an effort on the rate in exchange for the subscription to their offer.
Important: make sure to calculate the total cost of the mortgage with both options: the advantageous rate granted with the lender’s insurance and the less beneficial rate granted by the cheaper external insurance. To facilitate the comparison of the offers, the banks must also indicate the annual effective insurance rate.