Why interest rates are not the only consideration
That couldn’t be further than the truth.
In fact, if you consider the mortgages of the five big bank – RBC, BMO, TD Canada Trust, Scotiabank and CIBC – the only commonality is the interest rate. The 20 or so pages that make up the rest of the mortgage document are completely different.
To put it into perspective, every other good or service you buy is priced in dollars and cents. A mortgage, on the other hand, is priced in per cent, which is the factor by which the dollars and cents are calculated.
The interest rate is part of a bigger picture that, along with terms and conditions, will determine the price.
The actual cost of a mortgage includes many other things, such as how the payout penalty is calculated, how much of the mortgage you can pay back without penalty and how a bank registers the mortgage.
Payout penalties are by far the most important item to consider. Often buried in the fine print, the method of calculating a payout penalty can be the difference between it costing a few thousand dollars or tens of thousands of dollars to break a mortgage. For example, Scotiabank’s mortgages tend to have the least expensive payout penalties of all the big banks, which is why our personal
mortgage is there.
Monoline lenders, which typically deal only with mortgage brokers, often have even more favorable payout penalties than their bank counterparts. Coincidentally, they are often funded by the big banks and have highly competitive rates.
Pre-payment privileges also play an important role in determining the cost of a mortgage. The lower the pre-payment privileges, the greater the obligation a borrower has to pay more in interest. Lower pre-payment privileges can also mean a higher payout penalty.
Other minor subtleties can also end up costing more money. Borrowers who get stuck with bona fide sale clauses won’t be able to payout their mortgages in their entirety unless they sell the house. In other words, borrowers won’t be able to refinance to another lender for a better deal, which could prevent them from saving money elsewhere.
With so many different terms and conditions out there, it’s misleading to simply use rate as the sole factor when choosing a mortgage. The only way to really see all of the options is to talk to a licensed professional – better yet, an Accredited Mortgage Professional (AMP). You can find one at Mortgage360.
Nolan Matthias holds a Bachelor of Arts Degree in Economics, is the co-founder of Mortgage360, and the author of The Mortgaged Millionaire.