Do You Have a Chocolate Covered Mortgage?
I have something shocking to tell you. Ready? Canadian banks are a business like any other. Gasp and shock! This is nothing less than the truth. They are mandated to produce profits and provide their shareholders with a dividend at the end of the year. This is accomplished by charging us service fees and interest on loans and in a wide variety of other ways. Given that the Canadian banking system is one of the strongest in the world which in turn benefits our economy as a whole, I certainly do not begrudge them their right to a profit. So why am I drawing attention to this you may ask, well I will tell you.
As a mortgage professional I am often told that people would rather stay with their bank because their bank has been so good to them or because the family has been with that particular bank for generations and I am genuinely baffled by the prevalence of this attitude. Of course your bank is good to you! You are a good person who pays your bills on time, has an account, or several, which generate a monthly service fee, and when you have borrowing needs you go to them and they lend you the funds at a reasonable rate. When it comes to a mortgage though the loyalty you feel to your bank and the assumption that they will take care of your best interests can come with a high cost if you don’t understand the fine print. Let’s look at some of the things you need to be aware of shall we?
- Best Rates – I see this so often. Clients come in with their bank’s best offer which is considerably higher than the going market rate only to be told the bank is able to match after they spend a pile of time rate shopping. Your mortgage rate determines your payment and affects your family’s budget. Make sure you get the best rate you can.
- Prepayment Penalties – In Canada there is no set standard as to how the banks and other mortgage providers have to calculate the penalty if you break your mortgage. A mortgage is a contract after all. The banks have a right to expect a certain rate of return on the loan they have made to you but life happens and a major event can cause you to need to break your mortgage so make sure your penalty will be calculated reasonably. I have seen this amount vary from $4200 to over $10,000 given the policy of the lender involved on the exact same mortgage amount and time remaining in the term.
Lenders are required to disclose the calculation to you but you need to be aware that some banks will calculate your penalty in a way that is most lucrative to them.
- Collateral Mortgages – Many of the banks now register your mortgage differently. Say your mortgage is $250,000 but your home is worth $300,000. In this instance the bank would register a charge on the title of the home for the higher amount. The reason is so that if down the road you wish to get a home equity line of credit that you do not have to pay the legal fees again to do so. That can be a useful tool. The flip side is that this type of a mortgage is trickier to switch to a new lender at renewal. You may not be able to take advantage of todays’ crazy low rates in a fee free switch if you have this type of a mortgage.
Placing your mortgage with your own bank does not all of a sudden turn it into a chocolate covered treat and as you can see it can actually be very costly in the long run to choose one lender over another without educating yourself on their policies. Make sure you are choosing the best overall mortgage so that you are ready for anything life hits you with.