Negotiating my variable rate mortgage

November 2, 2005 2:36 PM

Can I renegotiate my variable rate mortgage?

I have a variable rate mortgage. My rate was 3.65% for the past three months. I just got a notice saying it is now 4.15%, which is .6% below prime. However, the posted rate at the bank is 3.95%. Can I ask for this rate and, if so, how would I do that in the most effective manner?

It bugs me that the bank bumped my rate .5% when the Canadian Bank Rate has only gone up .25% and my bank is advertising that their variable rate is 3.95%. Some other banks have 3.95% rates -- I could move to another bank ($250 discharge fee + $2 months of interest), causing my bank to lose my business.

Any suggestions for negotiating my 1.5-year-old variable rate mortgage?

posted by acoutu to work & money (20 comments total)

I'd be surprised if the terms of your mortgage don't allow them to fudge like that. To get the lower rate, you'll probably need to refinance, which carries with it enough charges as to make it uneconomical for such a small difference.
posted by adamrice at 2:59 PM on November 2, 2005

The ability to adjust the rate is the very reason the initial rate was low. You bought a low initial rate, and you also bought the risk (certainty?) that it would go up, and fast.

As adamrice says, assuming these are the terms of the mortgage, you're not going to convince anyone to "renegotiate." The good news is that you can refi any old time you like -- and you should do so whenever the costs of continuing your existing mortgage are greater than the costs (including fees and rate) of a new mortgage.
posted by pardonyou? at 3:06 PM on November 2, 2005

I should note that my rate had matched the posted rate for the previous 18 months. I did not mean that I had a low rate for just 3 months. I meant that the bank had suddenly cranked my rate so that it is above the posted variable rate.

Someone had mentioned to me that you can ask your bank for a better rate without having to refinance. I just wanted to ask the Mefi world if renegotiating the rate was, indeed, possible.
posted by acoutu at 4:45 PM on November 2, 2005

Isn't it more likely that the mortgage is variable based on some other index than the one you're looking at?
posted by smackfu at 4:55 PM on November 2, 2005

Well, yes. It's based on prime -.6%. I'm not mad at the bank or feeling that they're pulling a scam. It's just that we'd had the same as the advertised rate up till now and were under the impression that prime -.6% was the best they offer, since they are a no haggle institution.
posted by acoutu at 5:00 PM on November 2, 2005

I don't think you have much room for negotiation here. This is exactly what you signed up for. And consider that you still have a very good and affordable rate. Can I assume that you will eventually get a 30 yr fixed? Don't wait too long if you plan to keep the property.
posted by snsranch at 6:01 PM on November 2, 2005

We're not planning to stay here for more than 1-3 years. Why are you recommending 30-year fixed?
posted by acoutu at 6:45 PM on November 2, 2005

We're not planning to stay here for more than 1-3 years. Why are you recommending 30-year fixed?

Probably because you didn't mention before how long you were planning on staying, and because you're complaining about your variable rate. A 30-year fixed rate is, well, fixed. Problem solved.

No one says you have to stay in your house for 30 years, it's just the way the loan is structured. But if you're positive you're only staying for three years maximum, then look into some 3- or 5-year ARMs. That way you can have a fixed rate for 3 or 5 years, and they can't possibly change your rate before you move, as long as you stick to your plan.
posted by deadfather at 7:22 PM on November 2, 2005

FWIW, I've got a CIBC mortgage at prime less 0.75% = 4% at the moment.

I've also read repeatedly that fixed rate mortgages never save you money. Even as wildly varying as they are, variable rate morts cost less no matter what historical time periods you consider. AFAIK, YMMV.
posted by five fresh fish at 7:59 PM on November 2, 2005

Even as wildly varying as they are, variable rate morts cost less no matter what historical time periods you consider.

Well that definitely not true. Take a look at what happened in the late 70s, early 80s. And take a look at what's been happening for the past year and what's forecasted to happen in the next few. Anyone who locked in a 30-year fixed at rock bottom is pretty much guaranteed to save over a mortgage that is already varying.

Mortgages are simple math exercises. That said, there is a LOT of shady advice floating around. Mortgage lenders are making asses of themselves all over the continent, taking risks and pushing loans they shouldn't. I would highly advise anyone who is loan shopping and isn't educated about mortgages to seek the advice of a fee-based financial adviser, especially in the next year or so.
posted by deadfather at 9:03 PM on November 2, 2005

My fee-based financial advisor agreed that we should keep a variable mortgage. When I studied random walks for mortgages in grad school (recently), my finance prof also recommended variable rates. When I did a random walk on mortgage rates 18-months ago, the variable won out.

I'm not complaining about the fact that my variable rate increased. I am complaining that it is higher than the posted rate and that they increased it by more than I would have expected (given recent .25% rate increases elsewhere).

Are 30-year mortgages even available in Canada? I've never run into anyone with more than a 5-year term, although I understand some banks do 10-year mortgages.
posted by acoutu at 9:34 PM on November 2, 2005

No, we don't have 30-year mortgages in Canada.

Take a look at what happened in the late 70s, early 80s.

I remember my parents stressing about that. Mortgage rates went up to 18%.

I don't know if a random walk is the best way to compare variable-rate and fixed-rate mortgages. If there's any kind of political instability--another Quebec referendum, for example--you can expect long-term interest rates to head straight up. Personally, I've always gone with 5-year fixed-rate mortgages.
posted by russilwvong at 9:53 PM on November 2, 2005

Actually, in 1982, mortgage rates went to 20.75%. My parents had a fixed-rate mortgage that came up for renewal, having previously been something like 12.75%.

Why do banks offer such low rates on long-term (5 - 10-year) fixed rate mortgages? They would want to minimize their risks, so they must think rates are going to stay relatively stable.

(And, FWIW, I think my question about whether the rate can be negotiated has been answered. I just didn't want to find out that you could ask for a better rate, the way I discovered you can with loans, GICs and other things. In recent years, I've learned you can get banks to waive fees and increase/decrease rates.)
posted by acoutu at 10:35 PM on November 2, 2005

I'm not entirely sure the banks are going to be too anxious to jack up the rates. Our population is now over 100% financed: people have borrowed more than they earned. Jacking the rates puts them into bankruptcy, decimating the bank's biggest customers... and unless they plan to sell the country to China, the banks won't get all their money back.

I think our nations have set themselves up quite nicely for failure. There's gonna be a lotta hurting coming 'round.
posted by five fresh fish at 10:56 PM on November 2, 2005

Why do banks offer such low rates on long-term (5 - 10-year) fixed rate mortgages? They would want to minimize their risks, so they must think rates are going to stay relatively stable.

Sure. But as I understand it, there may be something of a herd mentality among financial analysts, causing their collective estimate of risks to be either too high or too low. For example, if everyone else thinks another Quebec referendum is unlikely, it's easier to go along with that opinion than to argue against it.

I'm not entirely sure the banks are going to be too anxious to jack up the rates.

They may not really have a choice, if we hit some kind of political turbulence and foreign investors start moving their money out. In that kind of situation, you have to jack up short-term interest rates to stop the bleeding.

I realize that this wasn't the original question. I just wanted to point out to acoutu and fff that they may be underestimating the risks of variable-rate mortgages. I'll shut up now.
posted by russilwvong at 11:56 PM on November 2, 2005

and unless they plan to sell the country to China, the banks won't get all their money back.

Here in the US of A, that's exactly what we did. Whee, I hope it works!
posted by deadfather at 6:34 AM on November 3, 2005

It may over the long term cost less to have a variable rate mortgage. But it's not the answer for everyone. Variable rate is a bad idea if you need stability in what your payments will be for the next n years. I got my mortgage 2 years ago when rates were nearly at their lowest point. And I locked it in so that my payments were not going to go up for years.
posted by raedyn at 7:32 AM on November 3, 2005

We put the difference between fixed and variable into a savings account, then put that towards the mortgage. It forces us to live like rates are always higher and has the effect of putting our money toward the principal, not the interest.
posted by acoutu at 11:08 AM on November 3, 2005

The low initial rate is what the industry calls a "teaser rate." It's there to make the loan more attractive in the short term. Technically you're getting exactly what you bargained for but if the current market rate is reasonably below your new adjusted rate, the lender might entertain renegotiating the rate to keep you as a customer (if you refinance with somebody else they lose you and servicers hate that.)

Short answer: it doesn't hurt to ask.

Re: modeling mortgage rates. There are random walks and there are random walks. They're all very sensitive to input assumptions, and usually implicitly incorporate some variation on the theme "history repeats itself." It's arguable whether looking at a single number is useful at all when discussing risk (e.g., folks throwing around OASes without considering distribution of outcomes.) I've seen many poor implementations and even more poorly-informed interpretations in the field (including one that led to a $2 billion writedown and actually moved a foreign exchange market when it was corrected). The biggest problem with most of them is that the interest rate market doesn't really conform to the underlying conditions assumed by a Wiener process.

So be careful when modeling this stuff unless you know what you're doing (and no, reading a couple of chapters in a Fabozzi book doesn't mean you know what you're doing!)
posted by Opposite George at 11:16 AM on November 3, 2005

Well, I have an MBA, but I am by no means an expert in this stuff.

I will ask. The worst they can do is say "no".
posted by acoutu at 6:06 PM on November 3, 2005