All Mortgages Are Not Created Equally
2016-04-08 | 14:08:18
Are all mortgages created equally? In short the answer is no. There is a common misunderstanding that the only thing that differentiates one lender from another is mortgage rate. So the consumer is left with the perception that if they got the lowest rate available then they in turn got the best mortgage available. This misconception can actually be very costly for consumers. In this article we are going to illustrate how that can be. Let’s turn back the clock a few years and analyze three different first time buyers and their respective mortgages.
All three buyers are purchasing property for $275,000 with 5% down. After default insurance fees they have all ended up with a mortgage of $268,434.37, all three mortgages will be amortized over 25 years. Buyer #1 has a rate of 2.99%; Buyer #2 chose a lender with a rate of 3.09%; and Buyer #3 went with 3.19%. Buyer #1 is going to pay $13.80 less per month than Buyer #2, and $27.69 less per month than Buyer #3. Our assumption then is that Buyer #1 is better off because they will be paying $165.60 less per year than Buyer #2 and $332.28 per year less than Buyer #3.
Life being what it is, things happen; you may be surprised to know that 50% of mortgages in Canada are broken before term and result in a penalty*. So let’s say both Buyer #1 and Buyer #2 need to sell with two years remaining in their five year terms, which means they are both going to have to pay a penalty to break the mortgages early. Buyer #1 with the lowest rate was not aware that their lender considered the 2.99% a deeply discounted rate from posted and will be applying the discount of 2.25% (the posted five year rate at the time of origination was 5.24%) to the penalty calculations resulting in a penalty of $12,332.11. Buyer #2 used a lender who did not consider the rate of 3.09% a discount, and therefore did not apply the difference from the 5 year posted rate to the calculation. Buyer #2’s penalty is $1,907.39. Buyer #1 paid $5,961.60 less in monthly payments over the three years of the term than Buyer #2, but because of the inflated penalty, despite having a higher rate Buyer #2 is coming out ahead!
Now let’s look at Buyer #3, nothing has come up that has caused them to break term early, so there is no need to pay a penalty. However at the end of their five year term they have decided that they would like to switch lenders, for whatever reason (maybe to get a lower rate!). They will not be seeking additional funds, or changing the remaining amortization in any way, so they are confident that they will be able to transfer the mortgage to a new lender without incurring any costs. Unfortunately when they went to talk to a mortgage professional, they discovered that their current lender registered the mortgage as a collateral charge as opposed to a conventional mortgage charge, and as such they cannot transfer the mortgage without incurring new legal and possibly an appraisal on the property.
So as you can see from the examples above, no, not all mortgages are created equally and there is much more to a mortgage than just a rate. Ask yourself, if you were in Buyer #1’s shoes and had known about the inflated penalty calculation, would have chosen that mortgage just because the rate was 0.10% lower? We have all heard the saying that “knowledge is power”, it will always be in your best interest to analyze all aspects of a mortgage before choosing a lender. There truly is no one size fits all mortgage.
*Robert McLister, 3 Month Penalties Aren’t Always Clearcut, CanadianMortgageTrends.com August 31, 2012