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27 Mar

Why it’s not just about the rate: Part 1


Posted by: Aneta Zimnicki

Believe it or not, it is not all about the rate.  Yeah, it may feel cool to tell your co-workers and friends the smoking deal you got on your mortgage, but does the product really work for you?  Sophisticated investors know that mortgage flexibility and the details are just as important!

Lenders, especially the retail banks, know your hot button.  That is why sometimes you see special rates that attract customers and a lot of buzz, but once you get into the details, you see
the product is inferior, inflexible, has restrictions, unpleasant penalty fees, unfavourable renewal policies and in general makes it super painful to leave the lender.  They count on the consumer not delving into these details, sadly many are not explained these details properly.

As a sophisticated investor, you should always keep your financing options flexible.   If your mortgage strategy was simply to look at the best rate and go with that, you will probably paint yourself into a corner quickly.    There are many details you should consider that go beyond the rate.

Consider this analogy to mortgage shopping.  When you go for shopping for a car, you do your research, right? After your research, do you end up buying the cheapest car on the lot? No….you look at your needs and evaluate the car’s features, reliability and whether it meets your budget, then you buy that particular model.  So, how is shopping for a mortgage any different? Basing your decision soley on mortgage rate without considering the terms and conditions that will fit your long term needs is not in your best interest.  Focussing on a hair splitting differences in mortgage rates instead of the whole mortgage package does not yield you optimum results.

Here are some of the things  to consider beyond the rate.  Funny, many people don’t think about these terms and conditions until they actually need to use them, but then it’s too late, if you are stuck in a mortgage not fit for your needs.  Proper planning entails understanding the terms upfront, and asking your mortgage broker any questions about the details in the fine print.

What is the pre-payment policy? You may want to pay down your mortgage down the road or increase your payments, silly that some lenders penalize you for that.  Some unfavourable terms include :  low amount you can pre-pay (expressed as a percentage of your total mortgage amount per mortgage year), or, worse, no pre-payment permitted at all, minimum dollar amounts  that you can pre-pay at one time (ie. nothing under $1K),  limited number of lump sum payments applied per each mortgage year (ie. once per year you can pre-pay).

How do the penalties get calculated? This one is a biggie, ‘interest rate differential’ is a mortgage industry term which gives you the impression that the calculation is standard, but it is still very subjective how it is calculated (check out my related blog on IRD)  Sometimes the bigger the discount you get upfront for your rate means that large discount will be factored into your penalty calculation, costing you even more.  Also, there may be other miscellaneous fees for breaking the mortgage.  Nobody plans to break a mortgage, but unexpected things happen, you should prepare yourself.

Is mortgage term length right for you? Sometimes you see the rate specials only for a specific term length, for example 5 years.  But, does that match up to your plans? It may not be beneficial to go with the smoking deal, if you reasonably forsee that you will have to break the mortgage before the term end and pay the penalty.  You need to do the math to see if it makes sense.

What amortization is available and what would be your monthly payments? As a investor, you want to have the lowest monthly payments possible so you can qualify for subsequent investment property mortgages.  Longer amortizations yield lower monthly payments, paired with a generous pre-payment policy, you have  a win-win strategy.

How is the mortgage registered on title? This is a very sneaky aspect.  Many lenders now are gravitating towards a collateral charge, rather than a standard charge.  Essentially, a collateral charge ties up your property from secondary financing and other financing, some lenders automatically charge 125% of the property value (that’s insane, if the customer doesn’t understand what they are signing!).  There are benefits to a collateral charge, but you need to understand the full picture before making your decision.  Stay tuned for an upcoming blog on this subject matter.

What is the customer service after mortgage closing? You will have this mortgage for potentially as long as 5 years or longer, that is a long term commitment.  Do you want to commit to horrendous customer service while you are holding the loan? No frills or discount mortgage  may indicate the level of service you will get (or lack of service).  Some lenders have great online access, others have very limited online presence, and for example, for home equity lines of credit (HELOC), have very awkward and limited ways to move your money.  Some lenders force you to call in instead of checking online and distribute limited paperwork and information.    Others restrict your mortgage broker calling on your behalf to find out information, which could save you time and frustration when doing mortgage planning and trying to find out specific mortgage  details, terms and conditions and other mortgage-industry speak that may not be easily understood or interpreted.

Stay tuned for part 2 in an upcoming blog….