Yesterday, we talked about last week’s announcement that BMO is offering a new 2.99%, five-year, fixed-rate mortgage, and a reader asked, “What options would people want in their mortgage the most?”
But is this a question that people ask often enough?
Believe it or not, the rate you get might not be the most important aspect of your mortgage. If you think that five basis-points is enough to turn a blind eye to the fine print, think again…
As my regular readers know, I have one mortgage broker that I recommend to my clients, as I have worked with him and his team for ten years now.
This person is not my father, nor is he my best friend.
I don’t get kickbacks or referrals, and even if they weren’t illegal and unethical, I still wouldn’t expect a thing.
All I want is the best service for my clients, and I’m smiling from ear-to-ear.
When we start working together, I tell my buyer-clients, “Make sure you have an experienced, knowledgeable, up-to-date mortgage broker that works in Toronto, and does high volume. Your interest rate is not the most important part of your mortgage. You have to remember that.”
For some buyers, it goes in one ear and out the other. They only care about the rate, and when I tell them, “My mortgage broker has the VP’s of lending institutions and mortgage insurers on his speed dial; he can get anything done, and answer any question,” they don’t listen, and turn back to whether or not BMO can beat TD’s rate by 0.01%, and whether they can then shop that to CIBC for another one basis-point.
I firmly believe that knowledge and experience pays huge dividends, just like it does with Realtors. You can hire the cheapest Realtor out there, or even get “cash-back” from using some weird discount-model brokerage that only employs bottom-dwelling Realtors that have flamed out of the business, or you can use a top Realtor, who knows the market inside and out, and that Realtor will provide you with the insight, advice, and knowledge that will pay off for 10-15 years as you live in your home.
A mortgage broker can have the exact same impact, and just like using a Realtor, you don’t pay them a cent.
What I’m leading into here is this: when mortgage lenders introduced their 2.99%, five-year, fixed-rate mortgage last year, they offered a very stripped-down version of a typical mortgage, and the terms and conditions were all different.
While “Bob at BMO,” who works at the very front line, would likely tell borrowers that the mortgage is a great product, and that there’s no difference between it and the 3.49% mortgage they were offering a week ago, a good mortgage broker would point out every single difference there is.
On Wednesday, I’m going to ask my mortgage broker to do exactly that: point out the fine print in the 2.99% mortgage, and distinguish between it and the other products offered at higher rates.
But today, I’d like to ask what features borrowers are looking for, and start a discussion about whether rate is the all-important item, or whether the fine-print can completely trump that bargain-basement rate.
Here are some of the questions you should ask yourself:
What is the amortization period?
Once upon a time, we had forty-year amortizations!
Wait……that was only a couple years ago….
Today, we have a choice between a 30-year amortization, and a 25-year amortization in Canada.
A 30-year amortization allows you a smaller monthly mortgage payment.
A 25-year amortization allows you to pay off your mortgage quicker, as well as pay less interest.
Each product is right for different people, but the choice should hopefully rest with the borrower!
What is the pre-payment privilege?
While some people are living paycheque-to-paycheque, and scoff at the idea of “paying down” the mortgage, others might consider this a fantastic feature in the event that they have cash on hand.
We all run our personal finances differently, and we all have varying risk tolerances.
Some people would love to put their $40,000 April bonus right into their mortgage and pay down principal, and others would say “Why would I pay down a measly 3.29% mortgage when I can put that money to work for me in a DOW Jones that increased 30% last year?”
Again – we all have different ideas of what to do with our money, but paying down the mortgage has got to be on the minds of anybody with cash savings.
Can you increase monthly payments?
For those that don’t have the money, or the flexibility, to make a large lump-sum payment of principal, there’s always the option of increasing the monthly mortgage payment, and paying less interest, and more principal each month.
I understand that while some borrowers might like to decrease their monthly payments instead, if they’re falling on tough times, I probably run into just as many people who would love to pay down the mortgage faster.
This is a great feature for some, and completely irrelevant for others.
What are the break fees?
If you want to break the mortgage before your five-year term is up, there’s going to be a cost.
I once had a client (the dreaded “friend of a friend of a friend), who didn’t quite understand commerce in general.
I told her that since she and her husband had a mortgage at 4.49%, and the rates had dropped to about 3.49%, she would have to pay the interest rate differential between the two rates, which in this case, amounted to about $17,000.
“We can’t pay that,” she said, as if it somehow affected the sale of her house.
I told her that while I sympathized with the situation (this was a divorce, where they both cheated on each other with multiple partners, so I really didn’t feel all that bad for the mess that they made – with their 3-year-old daughter sitting between them), there was absolutely nothing they could do about the mortgage break fees.
That’s when she casually waved her hand in the air, and announced, “Don’t worry – I’ll call them tomorrow.”
You’ll call them?
“Hellooooo…….bank? This is Jane Smith, calling……”
And just like that……POOOF! No more mortgage break fees?
Mortgage break fees are as sure as death and taxes, because the lender is going to get paid, even if you don’t want the mortgage that you signed on for.
So what are the mortgage break fees and how do they work? Well, every mortgage is different.
Maybe it is important to read the fine print!
Is the mortgage portable?
What if you want to buy a larger house, or move out of the city?
What if you’re only two years through your five-year term, but unlike the situation above, you don’t want to break the mortgage; you just want to take it with you to a new property.
Can you do that?
What if you have a $300,000 mortgage on your $600,000 house, but you want to move into a $1,000,000 house? Can you bring that $300,000 mortgage to the new house, and “blend-and-extend” that rate and principal with added principal at a prevailing rate?
Well, it all depends on……wait for it…….the fine print!
And by the way – the print isn’t that fine. It should be spelled out for you, but then again, if you’re only concerned with the interest rate, then maybe you’re too busy to notice…
Can you refinance? Do you have options?
What if you want to take out equity on your home?
Let’s say you’re eyeing a cottage up in Muskoka, but all your equity is tied up in your primary residence.
Can you refinance?
Can you shop around?
Do you have to use the same lender?
All this and more will be discussed in tomorrow’s blog post when I bring in special guest: BATMAN!
(Note: the special guest is not Batman. It’s just my mortgage broker).
Tune in tomorrow!
(note: if you don’t get the reference, then you clearly didn’t go for Halloween as Adam West like I did in 1988…)