With thin margins in the mortgage business, lenders are always looking for ways to offer lower mortgage rates but still maintain profitability. The latest of these low-rate mortgage trends has been deeply discounted rates but with limited pre-payment privileges. One of these products may offer rates as low as 1.95% for a 5 year variable or 5 year fixed of 2.39%, but with a 2.75% administration penalty if you break the mortgage early.
On a $300,000 mortgage, a typical variable rate penalty would be about $1,600 (penalty for a variable rate mortgage is 3 months interest). If you ever had to break up your mortgage for any reason and you chose the lower rate option, your penalty could be around $8,250. The savings over the 5 year period would only be about $3,000 so that’s a big price tag to pay for lack of pre-payment privileges, lack of lock-in privileges, etc.
Many of these low rate products are with “non-bank” lenders, not major banks. In most cases, major banks’ products are usually fairly standard, and they don’t usually offer a normal full service product alongside a no frills product, with the exception of BMO. Only mortgage brokers have access to these non-bank lenders who have these no frill, low rate products, so if you think you are in the market for a product like this and are ok with some of the downsides, make sure to talk to your broker to learn more about the product.
Here is a list of important items you should ask about your broker or bank when negotiating your next mortgage:
- How much can I prepay per year with no penalty? (Standard is 15% – 20%)
- When can I make these payments? (most allow anytime during the year but some require only one payment annually on the anniversary date)
- How much can I increase my payments per year? (Standard is 10% – 100%)
- What is the penalty to break my mortgage? (most are 3 month penalty, with fixed terms having a potential Interest Rate Differential Penalty)
- How is my IRD penalty calculated? (Major banks have a really nasty calculation for their penalties that could cost you 2.5 times more than a “non-bank” lender)
- Under what circumstances can I refinance? (many of the low rate offers restrict this option)
- Can I lock into a fixed rate at any time? (some low rate mortgages don’t allow lock-ins)
- Am I guaranteed your best rate when I lock in? (most major banks don’t offer a guarantee)
- Are there any other bells and whistles that I get with this product?
Getting the best mortgage isn’t always about rate – it’s about value and about choosing the right term. A good broker will ask what your goals and intentions are to ensure your mortgage is properly set up for your short term goals but also for your long term goals.
Mortgage Alliance Meridian Mortgage Services Inc. – www.GreenMortgageTeam.ca
#2000 – 1066 W Hastings, Vancouver, BC V6E 3X2