Watch Out For Mortgage Traps

Is there a mortgage trap lurking behind that bargain-bin rate? Here's what to look for:

The 'Wrap You Up'

Otherwise known as the bona fide sale clause. If your mortgage comes with this ultimate restriction, it means you're stuck with your lender for the remainder of your term or until you sell your home.

Want to switch to another lender for a lower rate, or pay out your mortgage? You're bona fide out of luck until renewal. As well, there may be further pre-payment restrictions, or conditions on the sale of your home (like not to family members) to make it harder to get out of your mortgage.

Considering that the average 5-year mortgage typically lasts only about 3.8 years (e.g. moving for a job, needing to upsize or downsize), there's a good chance you may regret wrapping your mortgage with that ultra-low rate.

How to avoid? If you don't have a reliable crystal ball to read your mortgage future, instead, read the fine print for restrictive conditions. There are a few lenders that offer a sample commitment letter online, ask to see the mortgage contract and compare it to other products (or ask an expert mortgage broker for help).

The 'Harsher Payout Penalty'

Typically, a variable-rate mortgage carries a pre-payment penalty of 3 months' interest if you break or pay out your mortgage early. However, some ultra-low rate or no-frills offers on the web, even from big banks, may come with a higher penalty to help make up for the lower rate:

• Prime rate or a specified higher rate may be used for your 3-month interest penalty instead of your discounted contract rate.
• A flat percentage penalty may be levied on the remaining principal at the time of break or payout (can be around 3.0%).

See the table below for a comparison of these higher penalty cost differences.

And it's not just variable rates. Fixed-rate mortgages can also come with a higher 'posted' rate to calculate your penalty instead of your contract rate. (Our in-house, CMHC-approved lender, THINK Financial, prefers using a fair market rate when calculating fixed-rate IRD penalties.)

How to avoid? It's essential to look at the fine print of that great deal on your variable or fixed rate. Every mortgage contract has a section that outlines how your penalty is calculated, though the lender may not disclose your actual penalty rate until you break your term.

The 'Nickel and Dime' Hack

Some lenders offer a lower rate, but then tack on 'made-up' or hidden fees, like wire fees, or charge you if you make a change during your term, like from a monthly mortgage payment frequency to biweekly accelerated. These smaller fees can add up to compensation for the lower rate offered.

Or, you may have less flexibility on paying down your mortgage, for example, a 10% pre-payment privilege vs. 20% with a better mortgage.

If an ultra-low rate charges more for certain mortgage conditions, or leaves out ones that benefit you — you might not save as much as you think.

How to avoid? An expert mortgage broker can help you compare rates, products, and lenders to find the right fit for your financial goals.

At True North, we believe you deserve better rates and features, straightforward pricing, and no hidden fees. Our lowest mortgage rates are often through our in-house lender, and if we find that your best mortgage fit is with another lender, we help outline the fine print so that you're aware of any extra future costs.

The 'Sometimes-Tricky' Cash Back

Some Canadian homeowners need funds right away and look to receive that extra cash when their mortgage closes. So, lenders often campaign on 'cash back' deals, promoting your 'savings upfront,' which may seem like a great perk, at first.

Here's the catch. Most cash-back offers mean you'll pay a slightly higher rate to make up for it. The extra 'cash' isn't in addition to a lower rate. They're making you decide between getting cash now or having a lower mortgage payment during your term.

And that may be just fine by you — especially if you need those funds upfront for certain expenses (like moving, renos or furniture). Just be aware of what it really means for your mortgage budget later. If you need a cash-back mortgage, an expert True North broker can help you find your best fit.

How to avoid? Ask the lender rep or mortgage broker to break down the cost difference between getting your cash upfront or having a lower rate during your term. Then, you can decide on the financial scenario that works best for you.

Compounding Rate Trickery

Is your variable rate being compounded monthly or semi-annually? Semi-annual is the industry standard, and if a lender uses monthly for your variable-rate deal, you're actually paying a higher rate.

When you get a mortgage, the interest is calculated at intervals and added to the principal loan amount to make up your mortgage payment. An increased interval frequency, like monthly, means you're paying extra interest costs that accrue over time.

So, that ultra-low deal with a faster compounding frequency means paying 'interest on interest' more often, increasing the ‘real’ interest rate you pay despite your contract rate.

How to avoid? Your mortgage contract will specify how often your rate is compounded — semi-annually is standard. If it says monthly, you know that your lower variable rate offer is a trap, and your 'real' interest rate is actually higher.

Learn more about compounding frequency in our blog: Can you spot the hidden cost?

Feel great about the ultra-low rate you found on the web?

We'd rather you feel great about all the money you're saving with your best possible rate AND best product, together.

Getting your best rate for a mortgage that fits your situation is real savings, rather than unknowingly running into a web of higher costs down the road.

Sidestep the sticky (mortgage) strings.

Instead of being tricked into a costly situation by an ultra-low rate, take some simple steps to be aware of what your 'amazing' rate offer entails:

• Look up your mortgage fine print
• Ask a trusted mortgage broker to outline the details you may be missing
• Shop around for your best rate and fit

We're confident we can help you find your best rate and product, and our in-house lender often beats everything else (mortgage) out there. We offer transparency upfront to help you make an informed decision.

We're here for you, anywhere you are in Canada. Online, over the phone, through our chat, or at one of our 12 convenient store locations.