2 Oct 2015
It’s NOT All About the Rate
ob-sess(ed): the act of being preoccupied or fill the mind continually, intrusively and to a troubling extend.
As mortgage consumers, we get obsessed with obtaining the best rate – we are caught in the cross-hairs of lender marketing. Lenders spend millions of dollars annually to pitch their message; some listen and some don’t. As consumers, we all want make sure we are getting the best value for our money. When entering into the world of purchase and owning real estate, there should be a detailed plan laid out for one to follow. We should make sure all our plans fit the mortgage products we inherently rely on. Would you put a square peg in a round hole?
Along with making sure the mortgage product is suitable, there is also an element of competition between friends, family members and even colleagues at work. Consumers thought process goes something like this (…and I was once part of this faculty)…”I need to get the lowest rate so that I supersede the rate that (enter name here) got…” That statement couldn’t be further from the truth – it’s 100% wrong.
We all want to pay as little as possible up front, but never put any thought into life’s uncertainties. What if you need to break the mortgage?, to consolidate some debt, require equity for a renovation, moving to another town/city where your current lender does not lend, leverage equity to take advantage of some financial planning strategies…the list goes on.
60% or 6 out of every 10 mortgages that originally opt for a 5 year fixed term are changed/broken/altered 38 months into the contract. The act of breaking one’s mortgage will yield a penalty on the outstanding balance for 22 months. The penalty will be either an Interest Rate Differential calculation or 3 month interest, whatever is greater. There is so much more to choosing a mortgage rate and term than just the 5 bold character,s ?.??% being advertised.
Borrower’s have to look past the numbers and educate themselves on the terms of that rate being offered; the fine print!
Depending on the RATE and its terms, that penalty can be dramatically different. Lenders all have a suite of various products to fit you, the consumer’s, wants and needs. It’s up to you and your Mortgage Expert to navigate through the gauntlet of rate sheets and product information to find what works for you and your specific scenario. As Mortgage Experts, we here at Dominion Lending Centres have access to a wide range of lenders; major chartered banks, credit unions and investment lenders. At times there could be a difference of 10 to 20 basis points (0.10-0.20%) from lender to lender.
Let’s take for example a rate of 2.44% vs 2.64% for a 5 year fixed term. It’s obvious which one most borrowers would gravitate to, but is it worth it? What are the pitfalls? These two rates have drastically different penalty structures even though they are offered by the same lender. The 2.44% rate holds a 3% penalty on the outstanding mortgage balance (OSB). The 2.64% rate calculates the Interest Rate Differential (IRD) or 3 months interest, whatever is greater to determine the penalty.
Here is an example of what it would cost to exit these mortgage contracts early. We will use the 60% rule along with a starting balance of $330,000, 25 year amortization and $0 prepayments made to the principal for the first 38 months.
Rate 2.44% 2.64%
OSB @ 38 mos $298,401.05 $299,153.80
Penalty 8,952.03 $2,468.02
Monthly payment $1,468.45 $1,501.39
Difference over 38 mos $1,251.72
Same term but a different mortgage product yields a difference in penalty of $6,484.01. Over that same 38 month term, the higher interest will have an ‘out-of-pocket’ difference of $1,251.72. Now ask yourself, with all of life’s uncertainties, which would you prefer, the 2.44% or 2.64% rate? I would choose the higher rate and pay $5,232.29 less.
This is where having a knowledgeable Mortgage Expert from Dominion Lending Centres working for you pays off in spades. We will review your plan and recommend the best mortgage product. Make sure you examine all aspects of the mortgage, 60% of 5 year fixed mortgages are altered. Here’s yet another reason to always consider variable rate mortgages, much more flexible and only yield 3 month interest penalty on the OSB no matter where you are in the contract timeline.
If you are looking for personalized mortgage advice, contact me at Dominion Lending Centres anytime!