Can your current mortgage lender affect whether you can make a switch? In my case, it did

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A surprising thing happened when I went to renew my mortgage for a better rate with a big bank last month: they refused to take me because my mortgage was originally signed with an upstart provider.

It started when I consulted a broker in my town when my mortgage renewal came up this spring. She had great news – Scotiabank BNS-T was offering a rate of 5.09 per cent, which was better than the 5.49 per cent that my existing provider, QuestMortgage, offered me.

Ten days later, as I was nearing my renewal date, I got some bad news – my broker told me that Scotiabank wouldn’t accept a switch from QuestMortgage. Moreover, there were multiple other major lenders that she spoke with that also wouldn’t take a switch from QuestMortgage.

Apparently, my broker had never heard of such an issue before, and wasn’t able to get any sort of explanation from Scotiabank.

With my renewal coming up rapidly, I had no choice but to stick with QuestMortgage. It wasn’t the worst thing in the world – their rates were still pretty solid.

But the situation was inexplicable, and left me worried about what my options for switching will be in the future. My mortgage was in good standing, for a relatively cheap condo that was well within my means.

When I reached out to Scotiabank for this article, they declined to comment on the record about whether there’s a list of lenders they don’t allow transfers from. QuestMortgage also declined to comment on the situation.

But Rob McLister, a mortgage strategist and editor for MortgageLogic.news, told me that it’s completely possible that the terms of the mortgage from my original provider may have been the problem.

“When a new lender transfers in a mortgage, the terms of that existing mortgage are assigned to them. The new lender therefore needs to be comfortable with the old lender’s terms,” said Mr. McLister, who said Scotiabank may have not liked the terms of my agreement with QuestMortgage.

Laurentian Bank LB-T said that can sometimes be the case when doing a mortgage switch with certain lenders. Its subsidiary, B2B Bank, also declined to do a mortgage switch with me, instead requiring a more expensive and complicated refinancing process.

Rob Butler, a prominent Toronto-based mortgage broker, says the vast majority of homeowners have mortgages with legacy providers, which have very similar contract terms that have been in place for decades for their loans. The terms, also referred to as charge terms in the business, are essentially the big list of terms and conditions that you sign with your lawyer when you complete on your home purchase.

The problem is that newer or smaller mortgage providers might have charge terms that aren’t up to snuff with what the big players require. He has seen this play out when homebuyers get a mortgage with a tiny credit union in their town.

“Some of the super-small credit unions, the policies of those organizations are almost whimsical,” Mr. Butler said, adding that there is far less expertise involved in drafting the mortgage terms.

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Meanwhile, new online-only mortgage companies, which are becoming more common in the marketplace, are untested when it comes to simple mortgage switches. He says some of these companies have been around for just a few years, and their clients are only just having their mortgages come up for renewal for the first time.

Mr. Butler says this is likely the case for me. QuestMortgage started in 2022, and it’s possible that the bigger financial institutions are wary about working with mortgages that new lenders started.

Mr. Butler says there is one way around this, and that’s to refinance your mortgage, rather than doing a simple switch. But this can come with extra fees.

The biggest problem with refinancing is if you, like me, got a home with mortgage insurance. Essentially, if you purchase your home with less than a 20-per-cent down payment, then you’re required to purchase mortgage insurance, which will be rolled into your total mortgage amount.

The downside with a refinancing is that it’s expensive. Mortgage insurance cost around $10,000 for me. The upside is that it qualifies you for lower interest rates, since the insurance policy protects your lender if you were to default on your loan.

If you refinance after paying enough of your loan off, you’ll no longer need mortgage insurance. But Mr. Butler said that without that insurance, you could lose out on those lower rates.

Essentially, that means you paid five figures for mortgage insurance, and you aren’t even benefiting from lower rates any more.

All of this is concerning right now, but Mr. Butler is optimistic about mortgage switches in future years. He says it’s in the interest of every financial institution to make switches easier.

“Each and every year, lenders are becoming more adaptable to take advantage of transferring,” Mr. Butler said.

“Every lender wants a shot at getting your transfer business.”

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