With all the publicity about banks ‘duping’ their customers, it’s good to be informed on what to watch out for to ensure you aren’t choosing the short straw when it comes to your mortgage options.
These traps could potentially end up costing you thousands if you don’t know what to look out for, or what questions to ask. This is not just common with banks, but some mortgage brokers may also not be giving you the big picture. The downsides of these traps may not even be fully spelled out in the fine print, so it’s important for consumers to understand exactly what they are getting into when they sign for their mortgage.
All mortgages are not created equal, and the only way to truly ensure you are getting the big picture is to ask a lot of questions and to do a bit of research. While there are many things that can make one mortgage different from another.
Here are 5 things that your bank may not disclose to you when signing for your mortgage:
- Collateral mortgages
- High penalties
- Cashback clawbacks
- Inflated prime rate
- Monthly compounding
Mortgages can be registered as either standard charge or a collateral charge. With a standard charge mortgage, the mortgage can be switched to another lender at the end of the term with little to no cost to the borrower. You are free to shop around and transfer your mortgage to another lender at your terms end. Most mortgages are registered as a standard charge.
With a collateral charge mortgage, there are additional charges to switch lenders, such as legal and appraisal fees. This is in addition to your current lender’s discharge fee. These fees can be as much as $1,400 in total, which often come as a big surprise to anyone looking to switch their collateral mortgage at the end of their term.
There are some lenders who will now cover some, or even all of these fees for you, however, you may be looking at a slightly higher rate to have all the fees paid for you.
Sometimes a bank will tell their clients that there are no fees to exit a collateral mortgage other than their discharge fee. What they are referring to hear is THEIR costs. That part is true. The only cost is the discharge fee. However, they aren’t telling you about the legal and appraisal fees, which are third party costs.
TD, National Bank, and Tangerine are three lenders that register ALL their new mortgages as a collateral charge. Also, any mortgage with a 2nd component attached to it such as a Home Equity Line of Credit (HELOC) would also be registered as a collateral charge, regardless of the lender.
When breaking a fixed rate mortgage, the penalty is almost always the higher of three months interest or the interest rate differential. IRD), regardless of lender. However, there are different ways in which it can be calculated. Major banks, as well as some other lenders, will use posted rates to calculate the IRD. By using posted rates, the penalty to break a fixed rate mortgage could end up being significantly higher than that of most non-bank lenders. As much as 500% higher in some cases!
The other way of calculating penalty is based on contract rate (the rate your payment is based on). This is the most consumer-friendly method for calculating the penalty. It’s always good practice to ask your broker or bank how the penalty is calculated should you find yourself in the common position of needing to break your mortgage early.
The penalty to break a variable rate mortgage is most often three months interest, but never take this for granted. Always ask as there are some exceptions. Some lenders will use 2.75% or even 3% of the remaining balance, which would result in a significantly higher penalty. Also, some lenders will use prime rate as opposed to the contract rate to calculate the three months interest, so always ask about how it is calculated.
Inflated Prime Rate
Some banks, one in particular, use a prime rate that is higher than what all other mortgage lenders use, including the other banks. It’s a ‘special’ prime rate that they use for their mortgages only. The bank has a green logo and has two letters in its acronym, which may include the letters ‘T’ and ‘D’. This is only a concern when applying for a variable rate mortgage, and does not apply to fixed mortgage rates. When applying at this bank, they will quote you a rate of TD Prime – X%. To the unsuspecting borrower, TD prime -0.85% will sound like a better deal than prime -0.70% they are being offered by another lender, however, the actual rate of interest will be exactly the same. In most cases, they will quote you the rate along with the discount off prime. Just make sure you pay attention to the rate itself when comparing a TD variable rate mortgage, and not just the discount.
Fixed rate mortgages all have interest that is compounded semi-annually, regardless of the lender. Most lenders will calculate their variable rate mortgages the same way, however, there are some who compound monthly. This means that on a mortgage where everything else is equal, you would be paying slightly higher per month if compounded monthly. For example, on a $400,000 mortgage, amortized over 25 years with a 3% interest, your typical monthly payment would be $1,892.98 if compounded semi-annually. If compounded monthly, however, your monthly payment would be $1,896.85. Same mortgage amount. Same rate. Same amortization period. Yet payment is $3.87 more per month. Sure, less then the cost of a cup of coffee at Starbucks, but it’s still extra money out of your pocket.
Cash Back Mortgages
You always want to be on the lookout and be cautious of additional products or specific products a bank might try to sell you. If they are strongly pushing one specific product over another, or if they are trying to sell you something you don’t need, then that is one more reason to raise an eyebrow.
Cashback mortgages can be extremely profitable for banks, so it’s not uncommon for some banks to push them. As the name implies, a cash back mortgages will pay the borrower a certain amount of cash back at the time of closing. However, this is not ‘free money’. You are usually paying for it with a higher interest rate. Banks aren’t big fans of giving things away for free unless they are getting something out of it. In the event that you break your mortgage early, not only will you potentially be faced with a high penalty, but you’ll also have to pay back the cash as well. Most banks will pro-rate this, however, some banks do not. In fact, some banks will require 100% of this cash to be paid back to them, regardless of how late into the term you break the mortgage. So if you break the mortgage in the fourth year, you’ll still have to pay 100% of it back to that bank, and you’ll have paid the higher interest rate for nothing. Queue the bank’s cash register…. Cha-ching! Is it any wonder why banks have the biggest buildings in every city.
There is nothing wrong with dealing with banks. I place many of my client’s mortgages with big banks as sometimes it makes the most sense for them. Regardless of whether you choose to go through a big bank or non-bank lender, just make sure you ask a lot of questions about the mortgage options that are being presented to you to ensure there is no important information that may be ‘mistakenly’ left out.
Paul Meredith is the author of the Amazon #1 best selling book, Beat the Bank – How to Win The Mortgage Game in Canada, and has ranked as one of the top 75 mortgage brokers in Canada since 2016. He was a finalist for Mortgage Broker of the Year in 2018, and can be seen as the exclusive mortgage broker on season two of TV’s Top Million Dollar Agent.