It’s an absolute jungle of mortgage rates out there and we feel sorry for anyone who attempts to figure out what they actually mean. We’ll attempt to simplify the options, but the fact remains that it’s complicated and transparency is rather poor. The two big categories of mortgage products are full feature and restricted.
Full Feature Mortgage Rates
This implies that you’re getting all the bells and whistles with your mortgage. Here’s a list of some of the common features:
- Full pre-payment options without penalty
- Standard discharge penalties (3 months interest for variable rates and the greater of 3 months interest or the interest rate differential IRD for fixed rates)
- Portability between properties
- Ability to blend rates if additional funds are required
Who are full feature mortgage rates good for?
Everyone
Restricted Mortgage Rates
This implies that you’re getting a mortgage without all the features noted above. You should definitely be getting a lower rate if you go this route. Every institution that offers a restricted product puts a different spin on it; however, the common goal is typically to entice clients with a lower rate upfront that is offset by some form of restriction. Common restrictions include, but are not limited to, the following:
- Inability to leave a lender during the term without a bonafide sale
- Increased (non standard) penalties to break the mortgage
- Restricted pre-payment amounts
- Not portable and unable to blend to term
Who are restricted mortgage rates best suited for?
Not everyone. Obviously.
Here’s what we think.
When comparing rates, you need to look at everything. Full disclosure, we are big rate discounters, but our model has always been based on offering the best mortgage products at the best rates. Based on that, there is a very clear difference between the LOWEST RATE and the BEST RATE. If you’re being offered a full feature and a restricted product at the same rate, obviously you will opt for the full feature mortgage. You need to be rewarded to take on a restricted mortgage and the more severe the restriction is, the deeper the discount should be. It’s common sense.
There are mortgages with insignificant restrictions that are appropriate for some people. For example, one product doesn’t allow you to refinance to another lender during the 5 year term. So, if you’re purchasing with 5% down, this is a great option because you can’t refinance to another lender period without having at least 20% equity in the property. This, to us, is an acceptable restriction.
Conversely, another restricted product carries a very large penalty that would annihilate the benefit of trying to save 5 – 10 basis points on the rate upfront (a basis point is 1/100th of a percent, so the difference between 1.8 and 1.85% would be 5 basis points). This, to us, is only acceptable to a tremendously small segment of the mortgage market who are blessed with the ability to predict and guarantee the next 5 years of their life.
For us at SPIN, we will fully support the first example above, but not the second without first obtaining written consent from the client. Far too many people, unfortunately, can’t predict the future and the average person only honours out 3 years of a mortgage term. When this happens, the adverse financial effect can be significant. At the end of the day, it comes down to disclosure and a solid understanding of the fine print. If everyone is on the same page, then there should be no problem.
There’s a lot more to rates than the naked eye can detect. Underwriting and rate policies vary wildly between lenders, but the biggest culprit remains the lack of transparency around restricted and full feature mortgages.
