There is an unwavering obsession with getting the lowest rate, but people have lost sight of what to look for in a mortgage. Yes, rate is important – we agree. We’re a rate sensitive company. That being said, all mortgage products/rates are very different if you take the time to figure out what’s actually important and what’s not. Here are a couple factors worth considering…..beyond rate.
Is it standard or collateral? A standard mortgage is transferrable to another lender at renewal without fees, whereas a collateral mortgage is not. You would have to pay a lawyer (BC, ON, AB) or notary (BC only) to re-structure the mortgage. So, if you’re always going to shop your mortgage around for the best rate at renewal, a collateral charge will be a hinderance. However, a collateral registration has benefits as well, which are discussed below.
A collateral charge (a.k.a running account) has a material advantage when flexibility and future investment are considerations. One of the best products on the market, in our humble opinion, combines a mortgage with a re-advanceable secured credit line. 1) A secured credit line carries a low rate, based off prime, and is interest only. 2) You don’t pay interest on a credit line unless you use the money. When you pay it back into the line, the interest payments stop. 3) Re-advanceable implies that as you pay down the principal of the mortgage portion, you’ll be able to access that money at a future date within the credit line without re-qualifying – this is huge! You can’t transfer it without fees at renewal, but why would you want to? It’s a great product. On a separate note, a mortgage product structured independently as a collateral charge (without a credit line) allows you to register for a higher amount. This allows you to refinance your mortgage (i.e., borrow more) and circumvent the legal process/cost. Under a standard charge scenario, you would have to pay the fees.
Most people ask about pre-payments. Yes, they’re important, BUT you have to ask yourself how realistic it is that you’ll have some extra cash to actually take advantage of this. Sometimes, you can get a better rate with less pre-payment options.
What are the discharge penalties? Are they standard or not? A standard variable rate penalty is only ever equal to 3 months interest, which is a nominal charge. A standard fixed rate penalty is equal to the greater of 3 months interest or the IRD. Find out how different banks calculate these penalties here. The various methodologies can create massive discrepancies in the penalty amount. If the penalty is not one of these, then it is not standard. An example is a flat 3% of the mortgage balance. In this case, you may be enticed by a lower initial rate, but will pay for it if you break the mortgage and then some.
Bonafide Sale Clauses
Some banks have rate incentives that specify that the only way to get out of the mortgage is by way of a bonafide sale. Simply put, you can’t refinance to another bank for a better deal. Depending on your deal structure, this could be a great product.
Blending a mortgage when you buy and sell or refinance allows you to add money to the existing mortgage without a penalty. If blending isn’t a standard feature, then there’s a very good chance you’ll be paying a penalty at some point unless you’re confident that you’ll be staying put in your place and won’t require extra money for the duration of the term.
Can you take your mortgage with you to another property? To another province? This is pretty important considering most people don’t honour out their mortgage term and interprovincial mobility is ever increasing. Often times, people buy/sell during their committed term. The latter would trigger a penalty if it’s not portable.
Rate Float Down
Often, a client will get their mortgage approved; however, prior to completion the rates drop. A lot of banks will not pass on this rate because they do not allow float downs or they’ll specify that the rates are for new business only. There’s not much you can do about this, but if it’s important and you’re a stickler for rates, you may want to ask the question up front to not waste anyone’s time.
This isn’t everything, but are a few of the key things to look for. A lot of the important features get overlooked these days because everyone is so hell bent on getting the “best” rate. We get it, but we also see the aftermath when circumstances change and the couple hundreds of a percent that were saved upfront are obliterated by penalties, fees, etc., that are not considered standard features in today’s mortgage world.