No-Frills-Mortgages If you’ve been scoping out fixed rates on the net lately, you’ve probably seen some pretty amazing deals.

While big banks are advertising 4.25% for a 5-year fixed, you’ll find brokers now quoting under 4.00%—with many as low as 3.85% or less.

Be aware, however.  The really low rates you see on some broker sites (3.85% and below) are generally not your typical mortgage.  They’re usually “no frills” products.

That means you get:

  • Minimal pre-payment privileges–typically 0-5% (vs. 15%-25% elsewhere)
  • Minimal payment top-up options—usually 0-5% maximum per year (vs. 20-25%)
  • 30 day closing deadlines (vs. 90 to 120-days)
  • Restrictions on how many pre-payments you can make in a year (vs. the ability to make extra payments on any payment date)
  • No pre-approvals
  • Restrictions on which lender you can transfer from and still qualify for free legal fees
  • Lack of availability in all provinces
  • Potential lack of portability
  • Longer-than-normal turnaround times on approvals
  • Subpar service after closing

No Frills mortgages are bare bones products designed for one type of person:  someone who doesn’t want to pay for added flexibility. 

No Frills products are also sometimes used as bait.  It’s no secret that low rates generate phone calls.  Once a customer is on the hook, he/she can then be upsold into a more profitable mortgage.  (That is how a small number of people–but by no means the majority–use them.)  Over time, our prediction is that you’ll see more and more mortgage sites advertising no frills rates for this reason.

In terms of pricing, no frills mortgages are usually 0.10% to 0.20% cheaper than fully-featured mortgages.  On a $200,000 25-year mortgage that will save you about $1430 over five years.

So the big question is:  should you get one? 

If you’re closing in 30 days, want a 5-year fixed mortgage, and don’t plan on paying down your mortgage aggressively, a no-frills product might be suitable. Mortgages are not unlike a car purchase.  It’s kind of a waste to pay more for a Porsche if you’re never going to drive it fast.

On the other hand, pre-payment privileges can come in handy if you expect to have free cash flow.  Pre-payments provide one of the best risk-free after-tax returns you can get. 

Using our prior assumptions, if you make a 13% pre-payment on a fully-featured mortgage (13% x $200,000 = $26,000) at the end of year one, the interest savings of the no frills mortgage disappears.  Any lump-sum pre-payments above 13% would then make the fully-featured mortgage the clear winner—despite its 0.15% higher rate.*

Pre-payments also come into play if you pay out your mortgage early.  (Most 5-year fixed mortgages are paid out 1-2 years before maturity on average)  Making a pre-payment right before your discharge can reduce your penalty by 20% or more.  This is especially relevant if IRD penalties apply. 


*  We’re comparing to a no frills mortgage where the hypothetical homeowner is making a 5% prepayment under the same timeframe (i.e.  one year into the mortgage).

Note to reader: In the event the satire of the above image fails, let us confirm that the No Frills grocery chain has not followed Loblaws into the mortgage business.  "No frills" is merely mortgage industry jargon and there is no affiliation with this most frugal and fantastic grocery store franchise.

  1. Careful, that is the emblem for the grocery store-no frills, let’s not be confused no frills the grocery store is not in the mortgage business, only the other grocery chain like PCF and wholesaler like Canadian Tire are, lol.

  2. Bottomline it is the same lock and float system in the states as a banker/broker. The broker in Canada should use the same system in this market which is win win for the client and the lender!

  3. Interesting…
    Rob – does CAAMP (or anybody else) have stats that give an indication as to what extent homeowners make use of pre-payment privileges?
    I realize that there are some people who try to maximize their flexibility and cashflow, and so didn’t shorten their amortization period to start with, as well as people who get out of their mortgages before their term is up, but is this really a significant proportion of the market?
    Different people have different needs, but I would wager that most people don’t/aren’t able to put down more than an extra 5% per year.
    Having said that, you’re absolutely right that people need to understand the potential trade-offs.
    Al R

  4. Al R, I’d be interested in that stat too.
    You’re probably right that most people don’t put down early pre-payments of more than 5% of principal, but I know a lot of people who do, including myself.
    One issue is the nature of the income. Some people have much less consistent incomes, either in terms of the amounts coming in, or in terms of the timing. I’d guess this would be especially true for someone like a real estate agent or an automobile salesperson or whatever.
    It would also have to do with the size of the mortgage. If you have $200000 remaining on your mortgage, perhaps an early pre-payment limit of 5% ($10000) would be more than enough. However, the same person but with only a $50000 mortgage may find 5% ($2500) too far too limiting.

  5. Hi Al and Eug,
    Thanks for the posts. Here’s the two stats I know of that pertain to lump sum pre-payments…
    CMHC’s 2008 Housing Observer survey found that “three out of 10 have at some point made a lump sum payment on their mortgage.”
    As cross refence, CAAMP’s 2008 Mortgage Market survey noted that 36% of consumers feel “Flexibility of making lump sum payments” is an “Important Factor for Lender Selection.”
    As a very general rule, if there’s a reasonable chance one will make a 10%+ prepayment sometime in the first half of his/her mortgage then a no-frills might not be for them. There’s also other drawbacks with no-frills mortgages to keep in mind, as the story notes.
    On the other hand, for certain homeowners who plan to stay in their house five years and have cash flow restrictions, a no frills might be just fine.
    As usual, each case is different. Last week, for example, I had one gentleman save $2800 off his penalty by making a lump sum pre-payment (from his LOC) right before switching lenders.

  6. “The Interest Act prohibits IRD penalties on terms over 5 years. In such cases, a maximum 3-month interest penalty may apply.”
    I have been trying to find “The Interest Act” that states this.
    Would this be remainng term or the starting term. If you had taken a 10 year term and there is 4 years left on that term , should it be only 3 months interest or IRD.

  7. I know for a fact that lenders will try adn get away with greater of 3 months interst or interest rate differential when you have a term longr than 5 yrs as it happended to me. I sent the lender a copy of the Act and they agreed to 3 months interest penalty saving me almost $6,000 pensalty. Link to the act from the Indeopendent Mortgage Brokers Assocation (IMBA) site is here check section 10.1

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