Mortgages – so much more than a rate

So the busy spring market has the lenders vying for your mortgage business.

As a professional I watch in amazement as offer after offer is thrown at you. But does the old adage of you get what you pay for apply?

Is choosing the cheapest option always the best option? This week we will explore some potential hidden details of which you should be aware.

Portability – portability gives you the ability to take your mortgage, without penalty, to another property upon approval. This is always subject to the new home meeting the lender’s guidelines.

For example, few lenders like former grow ops or properties with asbestos. Others do not allow mobile or modular homes. But we will assume you have found a wonderful new property which the lender likes.

You are able to move your current mortgage over to the new home and often increase the mortgage with a blended rate if additional funds are required.

The blended rate will be based on your current rate and the best available rate of that time.

Some mortgage specials do not allow you to port your mortgage to a new property. This means that if you decide to move for work or family reasons you will have to break the mortgage contract and incur the penalty costs. The risk is that if rates have increased you could also be looking at a much higher payment.

Pre-payment privileges – most lenders allow you to put extra money on your mortgage during your term. This can be through annual lump sums or doubling up your payments. Lenders can vary in how much extra they will allow you to put down but most times it is between 15% to 20% per year.

Mortgage specials usually limit you to 10% per year. Don’t get me wrong – 10% of $300,000 is still $30,000 but if part of your financial goals is to pay down your mortgage as aggressively as possible then you will want to be aware of this limitation.

Cash back mortgages. Lenders sometimes offer other so-called perks and one of these is a cash back mortgage. Upon closing you will receive between 2% and up to 5% of the mortgaged amount back in the form of cash. This sounds terrific. I would caution you take a very close look at the interest rate and the fine print.

The interest rate for this product is often considerably higher. This means that your monthly payment will be greater and that you will end up paying more in interest over the term.

All of a sudden your 2% is costing you much more than the amount you actually received. Remember minions, the banks are a business. They are looking to make money too.

The other thing to be aware of is this – that 2% will have to be repaid in full if you break your mortgage contract. What could this mean? Perhaps that you have less to put down on your next home or perhaps a higher penalty.

Incentives. So your lender is offering a gift card or other ‘bonus’ to sign? This is a tried and tested method of attracting new business. Just make sure that you are not signing up for a higher interest rate because of it. If your friendly neighbourhood mortgage broker is able to offer you 3.09% for example and your lender offers 3.29% but includes a gift card, which way should you go?

Do the math. On a $300,000 mortgage, that very small interest rate difference adds up to $1,867.80 over just five years. So unless the incentive amount matches up you may want to forego and choose the lower rate.

Getting a special or a bonus feels great, especially when handing over your hard earned savings for a down payment. But read the fine print, do the math and protect yourself. Not all mortgages are created equal, this is where a true mortgage professional’s advice can save you thousands.

Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.

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