Are super-low rates as good as they look? Find out whether your mortgage product is comparable to a Pinto or Ferrari.
The spring real estate market is now in full force and with the real estate market gaining momentum the next series of mortgage promotions and advertising by Canadian mortgage lenders has started to make headlines.
The vast majority of homeowners that are buying homes, renewing their mortgages, or re-financing their mortgages will focus strictly on the “best rate” and nothing else. They will head straight to the internet and find the lowest rock-bottom rate and as many of my clients say, “sign my life away”. To be honest I have never grasped this comment fully. My thought is, isn’t this the start of the next stage of your life? In my line of work it concerns me when homeowners focus their mortgage choice solely on rate. The reason being is that not all mortgage products are like comparing “apples to apples”. Let’s take a closer look…
In the past couple of years one of the major banks, in addition to other mortgage lenders have introduced mortgage products that were targeted toward homeowners that solely based their mortgage decision on rate and nothing else.
These mortgages are referred to as the following:
- No Frills mortgage
- Deep Discount mortgage
- Low Rate Basic mortgage
I personally refer to them as “restrictive mortgages” or “mortgages that come with handcuffs”.
These mortgages will offer you a rate of 0.10% – 0.15% lower than what a “standard” mortgage product would offer that has all the bells and whistles.
Let me define what a Restrictive Mortgage is…
It is a mortgage that incorporates one or more of the following conditions:
- Significantly higher penalties – most often penalty is 3x more than a standard mortgage
- Inability to discharge the mortgage unless the property is sold and must be re-financed with the same lender
- Not able to Port and Blend – if you move you can take your mortgage with you as long as the mortgage amount stays the same or less, which in most cases when homeowners move they will need additional funds
- Lower pre-payment privileges
- Lower amortization period
Realistically in the above conditions, 4 and 5 certainly are not going to affect your overall decision when choosing a mortgage, considering on average only 3% of mortgagors will make a lump payment to their mortgage. However, higher penalties, the inability to discharge a mortgage unless a property is sold, and the port and blend feature are all very, very important features to have in a mortgage.
As of April 3rd, 2014 a “restrictive mortgage” is being offered for a 5 Year Fixed as low as 2.89% and a “standard” mortgage is as low as 3.04%. Let’s compare these two mortgages side by side and see which mortgage in the end you would choose.
When comparing the above mortgage products the rates are significantly different, or are they?
Your payments are $38 less with the lower rate and your outstanding balance at the end of 5 years is only $1,235 less. To me these are not significant enough savings to convince me that a “restrictive mortgage” is worth taking.
In summary, if you were focused solely on rate then take the 2.89%, let the ink dry, and live happily ever after. If you make this choice just make sure that during your 5 year mortgage term you do not:
- plan to move and increase your mortgage
- re-finance to another lender that has a lower rate
- have a need to increase your amortization so you have lower payments
- go through a divorce and have to sell
- move in next to a not so perfect neighbour and need to eventually move
- make any changes to your income so you no longer qualify under your lenders guidelines
- have a need to access more money due to debt or health changes, etc
On average, 30% of my clients will contact me to make changes to their mortgage within 3-4 years into their term.
Please do not get me wrong, I strongly believe that a low rate is important and saving money is just as important to me as it is to you, albeit, there is something said for making sure you know your mortgage inside and out, and that you are aware of all of your options.
My advice the next time you need a mortgage is to be sure you are educated on available products and please ask Canadian mortgage lenders more than “what is your best rate?”. You should be asking “does this mortgage come with any restrictions?”. Protect yourself and ask the right questions.