Online access to information is fantastic! The ability to understand a glossary of terms and products out there is amazing when compared to even a decade ago. I love “Googling” and finding how to fix my car, or how to engage in my do-it-yourself home projects. I feel more informed and gain confidence embarking on new tasks.
Increasingly common is clients searching rates online or receiving rate updates via email and concluding that these are the rates they can get. The reality is that every person’s situation is unique and the property, or their scenario, may not allow for such a rate or product to be truly on the table.
The most common is that a better rate will be offered to a client with 5% down payment than one with a 20% down payment, which seems absurd on the surface, yet you have to understand that the mortgage with only 5% down payment is insured by CMHC, Genworth or Canada Guarantee. This mortgage insurance protects the lender against default, lowering lender risk and exposure, which is why a 5% down client can obtain a rate 0.05 – 0.10% better than the conventional client with more equity or skin in the game!
Other examples of factors impacting rate include lender perceived risk such as rental properties, self-employed clients, pre-approvals and credit issues. These examples can see a 0.10% to 0.50%+ surplus in posted rates.
Not to discourage folks from looking online at rate sites at all – it is important for clients to know that there are different business models out there within the Mortgage industry. There are many reputable online Brokerages that offer some low rates based on high volume alone. Volume and buying power are great and there are some clients and files that work really well in this space. One should also realize the importance of personalized professional service, future planning and that not all mortgages are created equally, nor is the service level.
There are cases where lower rate products come with restrictions or an online model fails to include your three to five year planning. Some low rate options are accompanied by high interest penalties such as 3% mortgage penalty – EVEN on a variable! I rescued a client from a mortgage they obtained online, hamstrung just like this with a contract rate over 3%; the penalty was over $20,000. I was able to get the penalty reduced, restructure all of their finances, refinance that mortgage and they were able to obtain their second home. Something that would not have been possible given the “deal” they thought they received originally.
Some offers have a cash back component with much higher contract rates than the discounted rate and are applying the cash back as a mortgage prepayment to arrive at a lower “effective” interest rate. Other lenders are offering a lower rate on the surface but the payment is based on a higher rate with higher payments. Most Cash Back mortgage rates are higher than that of a Line of Credit. With a Cash Back mortgage, you have to pay the penalty if you break the mortgage and in addition, you may have to repay the cash back advanced portion! This is still often true when used to prepay the mortgage down from the outset. I have seen set ups like this potentially cost way more in the end and prevent friends or clients from making a life change.
Exposure to Penalties/Repayments – using a $300,000 mortgage
Low Rate Product at 2.10% with a Penalty of 3%; $9,000
Regular Variable product at 2.20% with 3 months interest Penalty; $1,500 approx.
The payment difference is approximately $28.00/month or $1,730 in five years, which looks great at first, yet the exposure to the penalty risk should not be overlooked.
Here is one example of the fine print on one offer a client recently brought to my attention:
“LESS than 20% Down Payment Purchases Mortgages OVER $500K ONLY. This is an effective rate which incorporates cash back. A higher contract rate applies, upon which the actual payment is based. You will receive a lump sum of cash back upon closing, equal to the interest savings of the advertised rate. No Pre-approvals. No Rentals.”
Reading above, definitely some considerations that may or may not apply to your situation! Once noted, it clearly was not an option for this client.
Anyone can work on a mortgage alone, however, we prefer to drill down to feasible future planning and ensure that you are able to accomplish what you intend to beyond one mortgage. We are a full service broker who will have your best interests in mind prior to pushing any file!
Unlike unlicensed bank mortgage specialists, our job as a Mortgage Broker with Dominion Lending Centres is not to sell you a mortgage; it is to advise you on your options and to help you understand the implications of your choice. We truly hope this helps you in seeing both the differences and potential pitfalls of the rate game.
Ultimately, it is your home and your mortgage. I advise – you instruct!
Thanks to my DLC colleague Kris Grasty for this article.