Imagine you find yourself at a dinner party among friends and the subject of mortgages finds its way into the conversation. If your friends are like most homeowners, the topic of rate inevitably arises as each participant increasingly one-ups the last one with the crazy-low interest rate they shrewdly scored on their most recent mortgage. It’s become a sort of pride in social circles (and internet forums) to have the lowest rate when it comes to your mortgage… but often times the lowest mortgage rate can come at a high price.
An excellent example why ‘Cheap can be Expensive’ comes from writer Terry Pratchett and his character Captain Samuel Vines:
“But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that’d still be keeping his feet dry in ten years’ time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.
Much like the least-expensive car, the most inexpensive set of steak knives or the cheapest pair of boots, the lowest rate mortgage is often times more trouble than it’s worth. Here are four items to look out for before signing on the dotted line of the agreement on that unbelievably low mortgage rate.
MonsterMortgage.ca has discussed at great lengths in the past regarding the use of banks’ posted rates and the way in which they’re used to inflate the cost of penalties should homeowners choose to move or refinance their home before the end of their term. If you go to the mortgage rates page for one of Canada’s largest banks (go ahead, we’ll wait for you to come back) you might find rates on 5-year mortgages as high as 4.64%. A quick Google search shows that rates that high are far from being competitive, so why bother posting these rates online? The reasons are two-fold, big banks use the ‘discount’ of their posted mortgage rates as a bargaining tool to show homeowners just how great of a deal they’re getting on their actual interest rate and because the ‘discount’ or the difference between the posted rate and the rate you receive is used as a part of your penalty should you ever break your mortgage term.
That ‘discount’ could cost you thousands of dollars should you need to move or refinance before your mortgage term is up.
Be sure to also ask about the penalties and clauses to break any mortgage you sign up for. Some of the most punishing penalty clauses can be found in the lowest-rate mortgage products, ranging from penalties of 3% of your mortgage balance to requiring you to sell your home in order to end the term early!
Is your mortgage portable? Did your mortgage advisor or mortgage broker speak to you about the portability of your mortgage? Should you choose to move before your term is up, a portable mortgage could save you from the thousands of dollars in penalties you will incur. Super low-rate mortgage products will often have restrictive clauses that don’t include mortgage portability. If you’ve found a low rate mortgage, be sure to ask about portability as this feature could save you thousands of dollars in fees down the line.
Pre-payment privileges are often times the key to getting to zero faster on your mortgage. The ‘lowest rate mortgages’ in Canada are often very restrictive on how much you can increase your regular mortgage payment and on how much of your mortgage you may pre-pay each year. Having full access to pre-payment privileges keep more money in your pocket, and not your bank’s by allowing you to pay more money each year towards the principal of your mortgage.
Typically, full-featured mortgage products provide to you the following pre-payment privileges:
Annual Lump-Sum Option: Typically 15% of your original mortgage balance, this option allows you to pay up to a certain percentage of your original mortgage balance on a normal payment date.
Annual Payment Increase: On one occasion each year, your lender will allow you to increase your regular mortgage payment by a certain amount. Shrinking your amortization and allowing you to continue to attack the principal balance of your mortgage.
Double-Up Payments: On any one given mortgage payment, your lender will allow you to ‘double-up’ the amount you pay; providing to you another method to pay down the principal each year.
By using pre-payment privileges, one MonsterMortgage.ca client is now set to save over $60,000 over the life of their mortgage; meaning they’ll be mortgage-free years earlier and paying less money in interest to the bank too!
What the guests at the dinner party might not know: a 0.01% (one one-hundredth of one percent) reduction in your mortgage rate will save you $1.50 per month on a $300,000.00 mortgage. The savings become smaller as your mortgage balance declines as you pay it down over time. Over 5 years, a 0.05% difference on that $300,000 amounts to about $450 in savings — that money evaporates very quickly once overly-restrictive clauses and punishing penalties take hold to the tune of thousands of dollars.
The truly savvy homeowner knows that when it comes to the lowest interest rate, “Cheap is expensive.”
If you have any questions about these clauses or whether the lowest-rate you’re looking at is the right one for you, fill out the form at the top of this page and get the facts your bank won’t tell you about your mortgage today!
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