Hi Rob, Thanks for joining us. Mortgages are a hot topic right now so I am sure our readers will have plenty of questions for you.
Hi Melinda and everyone! It’s great to be here. Thanks for having me....
I want to start off by asking you a question about frills vs. no frills mortgages. Mortgage shoppers are always looking for the lowest rate possible, but are there some options that are worth paying more for?
Absolutely....First off, the standard disclaimer :)
We’ll talk about a lot of scenarios today. As usual, these are general tips. Everyone’s circumstances differ so this info may or may not apply in your
case…
Canada has 500+ mortgages to choose from, and a range of terms for each…
The differences are in the features and fine print…
Some mortgages have excellent flexibility and some are “low frills”…
Generally, the more flexible the mortgage, the more it costs the lender to fund, manage and service…and the higher the rate…
There are times when you don’t need flexibility. For example…
Suppose you’re a first-time buyer. You might not have much cash to prepay your mortgage. With a low interest rate and not much equity, you might also be less likely to refinance in 5 years…
You might also be very comfortable in your new home and have zero expectation of moving in 5 years...
For someone in this boat, a “low frills” mortgage at a lower rate might make sense…
But there are many cases where folks need more flexibility…
With mortgages, flexibility almost always costs more if you don’t plan for it ahead of time…
By cost more, I mean higher interest, more fees, and/or greater penalties. If it’s a “no frills” lender with a restrictive closed term, you might even be prevented from breaking the mortgage before maturity.
The most feature-filled mortgages in the country are rarely more than 0.2% more than a no frills mortgage. e.g., 3.34% instead of 3.14%...
Paying that 0.2% is often a waste if you don’t need the extra features, but 0.2% is a fraction of what you’d pay if you do need flexibility, only to find out later that you don’t have it.
Here are some examples of when you might want a more flexible mortgage…
Example #1) You need the ability to increase your mortgage before maturity and you don’t want to pay penalties or big fees [e.g., you plan to upgrade your home or take out equity to fund a major project, purchase, investment, etc.]…
Example #2) You need the flexibility to break your mortgage early and minimize your penalty…
Example #3) You plan to make large lump-sum prepayments
[with a bonus from work, settlement, inheritance, investment liquidation, etc.]…
Example #4) You plan to move fa
r away and need good portability features…
Example #5) You plan to lock in your mortgage to a fixed rate...
So with that preface, we can talk about the types of mortgages that fit each example, or open it up to questions...
If there's a good probability you'll break your mortgage before your term is up then...
You'll want to look at a mortgage that lets you out with a penalty and allows you to reduce your penalty with unused prepayment privileges
That's a great point. Maybe we can open it up to some reader questions?
Some lenders let you automatically apply your unused prepayment privileges to reduce your penalty 20-25%
Another thing is the penalty calculation...
Some lenders have brutal penalty formulas...
Albeit, with rates plateauing or heading higher, the odds of big penalties is less than it was in the recent past.
A typical big bank penalty calculation can cost you many times a small rate difference, as compared to a lender with a more "fair" formula
Hi Kanuj, I've heard clients talk about it but I've never seen a lender actually do it. :)
Lender profit margins aren't that different.....It's rare for one lender to make so much more than another lender that they can afford to eat the penalty....but I guess it depends on the size of the penalty
some will let you roll in the penalty to your new mortgage though
Hi JPRodrigue, The Finance Dept has suggested it won't mandate a specific penalty formula
