As I am sure you have seen there has been a lot of talk the past month about “rate”. Major banks have been advertising all time low rates and completing against each other very aggressively. Rate is certainly an important aspect of a mortgage and can directly influence the cost of the mortgage to you. It is also the easiest way to determine value in a mortgage. That being said there are other very important aspects of your mortgage that many miss. These can affect you in a much larger fashion then rate can and need to looked at carefully before committing to a mortgage.
I have attached an excellent article by the Vancouver Sun that explains some of the things you need to keep in mind. If you want to know how this could affect your own personal situation please contact me and we can go through and analyze what the best mortgage would be for you.
Vancouver Sun – There is more to mortgages than the rate
Because mortgages are about more than just the rate.
The recent dive to the bottom was set off by BMO Bank of Montreal re-introducing its 2.99 per cent five-year fixed mortgage earlier this month, after offering the same limited-time deal in January. TD Bank, Royal Bank, CIBC, Bank of Nova Scotia and Vancity all jumped in the pool with a similar-sounding 2.99 per cent four-year fixed rate. Coast Capital Savings Credit Union offers a 2.95 per cent four-year mortgage according to its website.
If the competition was between identical mortgages, one for five years and one for four, chances are the five-year would win by a stroke.
But you can’t just look at the rate, you have to look at everything, Feisal Panjwani, senior mortgage consultant with Invis-Feisal & Associates Mortgage Consulting in Cloverdale, advises.
For example, the BMO mortgage allows for a maximum amortization period of 25 years. Many conventional mortgages – including the four-year mortgages offered by the other banks — amortize the debt over 30 years. A 30-year amortization translates into lower payments, but greater overall cost if all 30 years are used to pay off the mortgage.
Other key things to look for in a mortgage are whether the mortgage has prepayment options, what the prepayment penalties are, and is the mortgage portable or assumable, or both, Panjwani said.
Often people think they won’t need these extra bells and whistles, but you do, he said. Things happen. You lose your job, or you come into some money, or rates fall even further. So it’s important the mortgage is flexible, Panjwani said.
BMO’s new offering, for example, only allows you to get out of the mortgage if you sell the property, he said. So if a borrower wants to switch lenders down the road but not sell his property, he or she won’t be able to do that.
Most mortgages, on the other hand, allow you to get out of the mortgage if you pay a pre-payment penalty, regardless of whether you are selling or just wanting to go elsewhere. But those penalties can differ, so make sure you know what your mortgage charges because penalties can be pretty steep, especially early in the mortgage term.
Many lenders use posted rates to calculate the penalty, Panjwani said. Take the example of someone who takes out a five-year mortgage today at 2.99 per cent from a bank whose five-year posted rate is 4.99, getting a discount of two percentage points.
Now say the person wants to get out of that mortgage in exactly two years, so there are three years left in the mortgage. The common method of calculating the penalty is looking at the three-year rate at the time, say it’s 3.99, and deducting the discount of two percentage points the borrower received to yield 1.99 per cent. The interest rate differential is then the difference between 2.99 (the amount the person is paying) and 1.99 (an equally discounted three-year rate) for the remaining term of the mortgage.
That can add up to tens of thousands of dollars, Panjwani said.
“$15,000 is very, very common,” he said. “I’ve seen some that are $30,000 or $35,000.”
In those cases people often decide it’s best to stick with the mortgage they have.
But some lenders follow a formula that Panjwani believes is fairer to borrowers.
Instead of using the posted rates less the discount, they look at actual rates. So the 2.99 per cent you agreed to pay would be compared to the discounted three-year rate which at a posted three-year rate of 3.99 would likely be around 2.99, he said. In that case the interest differential would be zero and the penalty would be three months’ interest, much lower than the $15,000 or so that might be otherwise payable.
Lump sum prepayments are also important, Panjwani said. Most mortgages allow annual payments of between 15 and 20 per cent of the principal. BMO’s time-limited mortgage only allows 10 per cent.
Most mortgages also allow you to increase your monthly payments by a certain amount, as much as 100 per cent, so you can pay off the mortgage sooner and with less interest. Others allow you to miss a payment which could be very important if you find yourself on strike or suddenly jobless.
Other questions to ask: If you sell and buy a new home can you take your mortgage with you? Some banks only allow you to port the exact amount you still owe so any upgrade will have to be financed by a separate mortgage. Others allow you to blend and extend — add to a mortgage and blend the new rate with the old one.
And with rates as low as they are, one thing to look for is assumability. If you sell your property, can the new owner assume your mortgage? That would add to the value of the property if the mortgage rate you have is low and rates have gone up, Panjwani pointed out.
So there are a lot of things to look at when you look at what mortgage is right for you.
“In my opinion, flexibility is king,” Panjwani said. “You want as much flexibility as you can get.”