The Devil In The Fine Print



Devil-in-the-fine-printMortgages sometimes have costly or irritating restrictions that you won’t know about unless you read the fine print or ask a mortgage professional.

Some examples:

  • Restrictions on breaking your mortgage before the term is up
  • Restrictions on breaking your mortgage for the first 3 years
  • A penalty surcharge of 1% for mortgages broken within the first 12 or 36 months
  • “Reinvestment fees” (on top of mortgage penalties)
  • Interest rate differential (IRD) penalties based on an onerous bond yield calculation
  • IRD penalties on variable-rate mortgages (usually IRD penalties apply to fixed mortgages)
  • IRD penalties based on a costly posted vs. discounted rate formula
  • Inability to port unless the purchase and sale take place on the exact same day (which can be hard to arrange)
  • A poor conversion rate guarantee
  • No refinances during the first year
  • No free switches (for transfer-eligible mortgages)
  • Amortization limits of 25 years
  • Minimum amortizations of 15-18 years
  • Restrictions on converting from a variable rate to a fixed rate for the first six months
  • No ability to break your “open” HELOC without a penalty
  • No pre-payments within 30 days of discharge
  • Inability to port across provincial lines
  • A “no rate drop” policy after approval
  • Monthly instead of semi-annual interest compounding on variable-rate mortgages
  • High administrative fees when porting
  • 100% clawback of cash-back if the mortgage is broken before maturity
  • Requirement for a full banking relationship with the lender
  • No lump-sum pre-payment privileges
  • No annual payment increase allowance
  • Pre-payments restricted to one specific day a year (instead of any payment date)

And the list could go on…

Keep a lookout for restrictions like this when comparing different mortgages.

It’s even more important when sizing up cut-rate mortgages because the lower the rate, the greater the likelihood that a mortgage will be somehow restricted.

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Comments

  1. Comment avatar

    Jason    

    i think its time for government regulation on the IRD charges.I dont even think the bank employees know how to calculate it.

     
  2. Comment avatar

    Vasile    

    I second Jason’s claim. When I wanted to refinance, I got three wildly different IRD values from the same lender during a 3-week period. The smallest was 6k, the largest was 20k. And yes, I checked that the lender’s rates didn’t move in that period.
    Regards,
    Vasile

     
  3. Comment avatar

    Ray    

    Thanks for this. That was nice of you to share all this broker intellectual property. I will use it as a checklist when I get my mortgage.

     
  4. Comment avatar

    doug    

    If you need assistance Ray i would be glad to help. doug, mawer@nbnet.nb.ca

     
  5. Comment avatar

    GrankKnost    

    From my understanding most of those items have to do with ending the mortgage before the term is up or changing to a different mortgage/house before it is up. So, is it safe to say that you 100% know that you will not break your mortgage before the end date then most of these are irrelevant (save the prepayment ones which most people should be asking about)?

     
  6. Comment avatar

    Banker99    

    GrankKnost, you would be correct with your statement however saying that you are 100% sure you will not need to break your mortgage is like saying you are 100% sure you will not need medicine from a Dr. over the next 5 years (or whatever term you choose)

     
  7. Comment avatar

    Tony_Anagnostou    

    There are many restrictions of this sort when refinancing. Meant to prevent us from finding more affordable financing to keep us on the never never plan rather than mortgage free.
    In most situations the IRD fee can be recovered in the first year of savings when refinancing and consolidating debt (Credit Card/LOC/Car payment) into a more affordable rate/monthy/or biweekly payments. Intererest charged Semi annually.
    This is also a good oprtunity to have your motgage agent agent find you a lender without many of the restrictions listed above. Work with a mortgage agent/Brokerage who has the ability to source 75-80 lenders products that suit you best. Rather than working with an agent that needs to position you with strictly with their institutions products.

     
  8. Comment avatar

    J.C.W.    

    12 out of 22 of these restrictions apply to people who are not leaving their lender. At least that is my count.
    By the way this is a great list CMT. I have already sent this article to my referral sources.

     
  9. Comment avatar

    GrankKnost    

    Banker, I don’t agree. While I agree that it will be very difficult for most people to say that they will NOT break their mortgage over a term BUT it not difficult for me. I know my situation and you dont so please think a bit more before you speak. My question was direct and specific and not general. Besides, I think your example is far fetched. Being sick is not something you choose. Breaking a mortgage or selling your house is something always within your control unless you were to not pay your mortgage. If you are not able to pay your mortgage then I think the penalties to break it are a secondary issue at that point

     
  10. Comment avatar

    banker in an ivory tower    

    Grank, if you are 100% certain of your situation, then you don’t need advice from anyone so I am confused why you would be asking for open responses on a public forum?
    For the rest of us who are never 100% certain of anything, what I got from this article was a very well defined list of differences in home mortgages. Home buyers often don’t realise this and buy mortgages like they buy milk, not noticing any difference at first until it turns sour a short time later and much to their financial detriment.
    Any good and impartial mortgage broker worth their weight already knows this and serves their clients well. Any homeowner currently shopping for a mortgage and wishing to do their own due diligence should find this short list invaluable. Nicely done, Rob.

     
  11. Comment avatar

    Mike    

    Marriage breakdown, job loss, job transfer, inheritances, lottery winnings, new girlfriend, horrible neighbors, find the house of your dreams, sickness, injury, dramatic rate changes, investment opportunity. Just a short list of why someone might move of sell their property sooner. For the small savings some of these mortgages give the potential downsides can be harsh if life gives you a twist. Another concern is what they will do at renewal and or will they even be around at renewal.

     
  12. Comment avatar

    Banker99    

    Thank you banker in and ivory tower and well as Mike saving me from having to reply to Grank.

     
  13. Comment avatar

    Robert McLister    

    Hi Banker, Thanks for the gracious feedback. I loved your (quite appropriate) sour milk analogy.
    Cheers,
    Rob

     
  14. Comment avatar

    andrew    

    Hi CMT,
    First time, long time..
    Thank you for all the work you do. I am an experienced broker and refer to your site all the time. Your work elevates the level of knowledge and professionalism for the whole industry.
    Cheers

     
  15. Comment avatar

    Robert McLister    

    Hi Andrew, That was very kind to say. Thank you! The journey’s been a lot of fun and just as educational for us! Cheers…Rob

     

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