Martin's Mortgage Maneuver: Frequently Asked Questions
Not quite getting how the MMM works? Here are some answers
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Here are some frequently asked questions about Martin’s Mortgage Maneuver and my answers:
Q: I’m more of a visual person. Can you explain how the Prepayment Charge and Interest Rate Differential (IRD) are calculated using a video?
A: Here’s a great, 3-minute video created by Preet Banerjee of the Globe and Mail. It’s a very easy-to-follow, generic explanation of how the Prepayment Charge and IRD are calculated.
Q: Can you explain Martin’s Mortgage Maneuver using a video?
A: In the future I might produce some videos but for now you can watch this youtube video created by Jacky Kuk. He’s really done an amazing job explaining Martin’s Mortgage Maneuver.
Q: Is my bank going to sue me after I pull this off?
A: they didn’t sue me. My own personal take is that there is next to no risk of liability (but make your own decision). Here’s why. Your mortage contract contains a provision that allows you to break your contract in exchange for paying a fee. That’s all you are doing. You are breaking your contract and paying the stipulated fee, which is not just permitted but expressly contemplated. You are not breaching or violating your contract. It just so happens that after you blend-and-extend it will be based on three months’ interest and not the IRD. The bank doesn’t need to let you blend-and-extend.
Q: When I refinance, can I take out extra equity in my home?
A: Yes. I moved from Meridian to Tangerine. In the year since I bought my home, it went up in value by $75,000. I increased my mortgage by $60,000, which Tangerine paid me in cash. I then invested this in a portfolio of dividend-paying stocks in my TFSA. Basically, I now have a five-year, $60,000 investment loan at 1.74% baked into my mortgage.
Q: What happens to your amortization period?
You can choose your amortization period depending on where you move your mortgage to. When I moved to Tangerine I also changed my amorization period, which had 24 years remaining on it, to 30 years. This was my choice and made sense for me. Even though I added $60,000 to my mortgage the combination of the longer amortization period and the lower interest rate dropped my bi-weekly payments by over $100.
If you’ve got high interest debt elsewhere (i.e. credit card, secured/unsecured line of credit, car loan, student loan, whatever) this is also an amazing way to consolidate that debt at a MUCH cheaper rate.
Q: Does this work at every bank?
A: No. It doesn’t. As of May 10, 2021 it still worked at Scotiabank, although I understand that sometimes they will deny the request to blend-and-extend. It might still work at a few smaller lenders. To my knowledge it doesn’t work at any of the other big banks (anymore).
On May 10, 2021 I saw a new blend-and-extend contract from Meridian. It no longer works at Meridian (at least at that branch). They have added a provision that prevents you from breaking your mortgage within the first six months after blending-and-extending. These changes in the contract directly target the MMM by forcing you to eventually base your IRD prepayment chargeon the four-year posted rates. The net effect is a huge IRD.
It doesn’t work at TD. But I have a friend that was able to add $350,000 to his mortgage which got blended in at 1.50%. He could do this because his home had appreciated significantly in value. He's going to use the money to refinance a HELOC and pay for renovations.
CIBC has a wonky way of doing this too. But the short answer is it doesn’t work.
Q: Do I base my IRD calculations on my old rates or my new blended rates?
A: When you get your blend-and-extend contract for review this will be your new contract. EVERYTHING is based on the information in this contract. You can completely forget and ignore your existing contract because once/if you sign the blend-and-extend contract your current contract will no longer exist. Again, only look at the terms and the numbers quote in your blended contract.
Q: What if it doesn’t work and I get hit with a huge IRD?
A: This can’t happen for the simple reason that you don’t have to sign the new mortgage contract. For example, after I blended-and-extended my rate went from 2.49% to 2.40%. When I did this I wasn’t sure if I’d then be able to break it and be charged 3 months’ interest. My reading of the contract suggested I could but I didn’t know for sure.
But before I signed the paperwork on my Tangerine mortgage, my lawyers received a “Discharge Statement” from Meridian. It is only then that I knew for sure that I’d not have to pay the IRD. If I were about to be charged $28,000 in a Prepayment Charge, then I wouldn’t have signed the Tangerine mortgage documents and stayed with Meridian at 2.40%.
Q: Can I get an even better rate or other discounts?
A: Yes. But you don’t get what you don’t ask for. Tangerine’s posted rates were 1.74% at the time I got my mortgage. Stupidly, I didn’t ask for a better rate. But if I’d asked for better rate I’d probably have gotten them down to 1.56% or 1.64%. A bunch of my friends who did this after me got anywhere between a 10 to 18 basis point discount off of the 1.74% posted rate. Today (May 13, 2021) rates are at 2.14% but you can probably get them down to 2.00%. Also, today variable rates can probably be had for 1.35%. When I signed my mortgage variable rates were at 1.70% so I didn’t give it serious thought. If I were doing this today, I’d take a long look at going variable.
You should also ask the bank you are refinancing with to cover some of your fees for bringing your mortgage over to them. Most of my friends who went with Tangerine got at least $1,250 and some got as much as $1,750. But again, if you don’t ask you don’t get. I unfortunately, did not think to ask so got nothing. The more money you can get the more attractive Martin’s Mortgage Maneuver becomes.
Q: Can I just blend and extend and leave it at that?
A: Yes, but you may not get the full benefit. The closer your current mortgage is to expiring, however, the more that today’s super low rates will influence your new rate. One friend’s existing 2.60% mortgage with 15 months left on the term were able to blend and extend at 1.82%. They decided it didn’t make sense to then break their mortgage and try and get an even better rate because the cost of breaking didn’t really offset the slightly better rate they would have received. They were fine with their new blend-and-extend rate. It still saved them a bundle and they didn’t have to pay any break fees at all. Obviously they are now locked in for another five years instead of 15 months though.
Q: My bank is saying they don’t do blend-and-extend. Is there anything I can do?
A: Maybe. At the end of the day all you are really trying to do is take advantage of today’s low rates. Instead of asking your banks about blend-and-extend (a nomenclature that’s not always understood) ask whether there is anything they can do to help you take advantage of today’s low rates. They might have a solution that is similar to a blend-and-extend and reduces your costs today. Most banks want to keep you as a client and they will work with you.
For example, as noted, my buddy with TD was able to add around $350,000 of debt to his mortgage (paid out to him in cash) at 1.50%. That’s pretty awesome - even if he couldn’t break his mortgage and refinance everything at 1.50%. In my view that’s a great, createive example of taking advantage of today’s low rates.
Q: What did the bank say after you did this?
A: I was actually very candid. In advance of executing this I indicated my frustration at my Prepayment Charge ballooning from $3,000 to $28,000.
After signing the blend-and-extend I called them up a day or two later and asked what my Prepayment Charge would be. They couldn’t believe it had dropped by $25,000. I actually explained to them exactly why it had dropped. My mortgage contact totally understood why I did this and acknowledged that it was the financially sensible thing for me to do. It wasn’t personal. It was about me saving $10,000 over the next four years or paying that same amount to Meridian. The choice was easy.
Q: Was this difficult to do?
A: Yes and no. It did take me a while to figure this out. I didn’t go into the exercise trying to figure out the MMM. I went into the exercise to try and figure out why my Prepayment Charge had gone from $3,000 to $28,000. Once I figured out the formula I realized that if I had a brand new mortgage I’d only have to pay three months’ interest and not the IRD. It took me several hours to break down the contract.
Getting the blend-and-extend was dead simple and free. The bank did a quick calculation to figure out my new blended mortgage rate and then sent me a new standard mortgage contract. Once I decided to blend-and-extend I think I had the contract the next day.
Moving to Tangerine was easy but took time. You have to go through the whole mortgage application again. You need to requalify, provide pay stubs, get a home appraisal, etc. All of that probably took me about 3 to 5 hours in total but spread out over a month.
I strongly suggest that you use Tangerine’s (or whatever bank you go with) lawyers and appraiser. It just makes everything way easier and besides. Also, as noted above, if you ask them to give you money towards these refinancing costs they almost certainly will, which may even pay for these incremental expenses in their totality.
Q: How long did you keep your new blend and extend mortgage?
A: Roughly one month. I’d already started my Tangerine application before I’d even got my blend-and-extend. I think I got my new mortgage at Meridian on October 30th. By November 30th I was with Tangerine. I made two payments under my “new” Meridian mortgage before moving to Tangerine but you could literally move the very next day.
Q: Do you need to re-qualify for a mortgage to do this?
A: I did not have to re-qualify with Meridian to blend-and-extend. They asked me for no documentation.
With Tangerine I did need to re-qualify. I had to go through the whole mortgage application process.
Q: Why Tangerine?
A: Honestly, I did a quick ratehub.com search and realized that Tangerine’s rate was better or as good as the best rates out there. Also I could see the actual rate that they were going to charge me (1.74%) as opposed to some fake posted rate that I’d then need to negotiate down. This transparency was worth something to me. I also had a Tangerine bank account so this made it easier.
As it turns out if I’d simply asked Tangerine for an even better rate I would have got it (I know two people who got 1.56% but that rate appears to no longer be available). They also would have paid me upwards of $1,500 to transfer my mortgage to them but I didn’t know that at the time. Everyone who’s done this after me, however, has done better than what you see on their website.
The other good thing about Tangerine is that since they don’t use fake posted rates you won’t ever encounter huge IRD’s again. There are only minor variations between the rates they charge for 3, 4, 5 years fixed rate mortgages as opposed to the massive declines you see in Posted Rates. They also always allow blend-and-extend. They also let you refinance at 30 years without charging you a premium (some other banks charge between 0.10% and 0.20% if you go with a 30 year amortization period instead of 25 year period). They also have great repayment terms. In summary, all this flexibility is amazing and rather unique. But again, I didn’t seek out Tangerine.
I’m not saying go with Tangerine but my experience was a good one.
Q: Wait a second, doesn’t Scotiabank own Tangerine?
A: Yes. It’s a bit ironic that the MMM works best with Scotiabank and that the vast majority of people I know have left Scotiabank to go to Tangerine, which is a Scotiabank subsidiary. But they operate as separate companies.
Q: Isn’t this unfair to the banks?
A: I’m not saying the banks shouldn’t be able to charge some fee when you break your mortgage. There are real costs to them and these costs should be covered. But these costs are covered by the three months’ interest charge.
I might also be sympathetic to using the IRD calculation if they were based on the actual rates that the banks charge for mortgages. But that’s not the case. The IRD Prepayment Charge is based on fake Posted Rates.
To illustrate, let’s pretend you signed up for a five-year mortgage today. In two years time you have $500,000 and 3 years left on your mortgage. Let’s further assume that mortgage rates remain the exact same as today.
At Tangerine, where they don’t use fake Posted Rates, the five-year mortgage rate is 1.74% and the three-year mortgage rate 1.59%. If you broke your Tangerine mortgage with three years left the IRD Prepayment Charge would be $2,250; calculated as: $500,000 * 3 years * (1.74% - 1.59%). See: Tangerine Mortgage Rates.
In contrast, at RBC (or any other big bank, I’m just using RBC as an example) the Posted Rate for a five-year mortgage is 4.79% and the Posted Rate for a three-year mortgage is 3.45%. These aren’t the rates that RBC charges new mortgage applicants. These are fake rates. See: RBC Posted Rates.
So why do banks use fake rates? Look no further than the IRD Prepayment Charge.
If you broke your RBC mortgage with three-years left the IRD Prepayment Charge would be $20,100; calculated as: $500,000 * 3 years * (4.79% - 3.45%).
That’s $17,850 or almost 10 times more than what Tangerine would charge to break the indentical mortgage!
Let’s unpack the Posted Rates further. In theory, RBC’s Posted Rates are telling you that there is a 1.34% premium on a five-year mortgage relative to a three-year mortgage.
Does that sound right to you?
If you walked into RBC today you could get a 5-year mortgage for 1.74% (even though their “special” rate is 2.04%). But could you get a three year mortgage for 0.40%, or 1.34% less? Of course not - for the simple reason that the interest rate spread between a five-year and three-year mortgage isn’t actually 1.34%. It’s more like the 0.15% spread that’s reflected in Tangerine’s rates. You could probably get a three-year mortgage at 1.59% at RBC.
So no. I don’t feel bad for the banks. This practice of calculating inflated IRD’s, in my view, is shameful and should be legislated out of existence.
Again, I’m not saying people should be able to break their mortgage for free. I’m saying the charge should be appropriate and calibrated to cover costs. Not to create a $17,850 windfall for the banks (using the RBC v. Tangerine example above).
These type of exhorbitant break fees don’t exist in the USA and clearly don’t need to exist in Canada. Obviously Tangerine doesn’t deem them necessary, or appropriate.
Q: Now that you’ve put this online won’t the banks find a way to block people from doing the MMM? Doesn’t that make you an A**hole?
A: To answer the first question, “yes” I expect they will close this opportunity - eventually. As of May 10, 2021 it may only work at Scotiabank, although since originally publishing this I learned that it didn’t work at most banks anyway. Even with Scotiabank, I’d expect them to prevent this soon too. I’ve already heard they are simply denying requests to blend-and-extend, although it seems to be on a branch-by-branch basis. If you tell them you want to blend-and-extend so as to pull of the MMM, you are basically guaranteeing that they will say no.