The Great Canadian Mortgage Rate Distraction: Hidden Mortgage Costs Revealed.

With so much focus and competition on interest rate, and limited mortgage education in the market, it’s easy for some lenders to get away with clauses in the fine print that can be very profitable for them, and expensive for you. So while rate is important, there’s a big opportunity here to learn about how you can potentially save thousands of dollars on your mortgage, by knowing what – or what isn’t in your mortgage fine print.

Mortgage Penalty

There are all sorts of things that can happen during a lengthy mortgage term that cause people to want to sell their property. In fact, more than 45% of Canadians end up changing or breaking their mortgage before the end of their term, and this is resulting in many thousands of Canadians paying mortgage penalties each year. Often these penalties are very, very high, where as other penalties are much more reasonable, depending on the lender. It all comes down to what numbers a lender uses in their penalty calculation.

An ‘interest rate differential’ penalty for example can be more than double from one lender to the next. Below is an example of what different penalties can look like on the exact same mortgage amount.

Mortgage is the same at $250,000, with a 3.39% 5 year fixed rate and 3 years until renewal. Example:

Lender Amount Rate 3 Years Until Renewal
BMO $250,000 3.39% $11,485
RBC $250,000 3.39% $10,931.06
TD $250,000 3.39% $11,925
CIBC $250,000 3.39% $12,441.85
Scotia $250,000 3.39% $10,125
MCAP $250,000 3.39% $4,625
First National $250,000 3.39% $4,625
RMG $250,000 3.39% $7,500
Merix $250,000 3.39%

Savings of $10,328 or more in penalty!

As you can see – the penalty amount differs widely from one lender to the next – and rarely do two mortgages ever have the exact same calculation.

Thinking about that ‘Mortgage Portability’ feature that your lender told you would help make moving to a different house easier? (moving the mortgage to a different house without breaking it). When a mortgage is ported or moved to a different house, often a higher mortgage amount is needed. This results in a ‘blended mortgage with the existing mortgage balance and the additional mortgage amount required. When lenders charge high penalties, what happens is that the rate they charge on the additional mortgage amount (when a mortgage is ported), is usually higher than their fully discounted, discretionary rates.

For example: If you carry over $250,000 to a new house, and require and additional $100,000 of mortgage to afford the new house, then the lender will charge you a higher rate on the additional $100,000. They would do this knowing that your only alternative, if you wanted to shop for a lower rate, is paying their hefty penalty on the $250,000 existing mortgage. This penalty cost would likely not make sense to pay, even with the lower rates out there. In other words, lenders with higher penalties can hold their clients to higher rates on a mortgage Port. With high penalties, the lender has the upper hand in the negotiation. With lower penalties, you have the upper hand.

So when looking for a mortgage, an important question becomes – Why align yourself with a higher penalty?


The Collateral Charge Mortgage

Another major trend in mortgages is the collateral charge mortgage. This type of mortgage has the effect of ‘locking a client in’ with the lender, because a client is not able to transfer their mortgage to a different lender on the renewal date at the end of the term.

Q: Why bother leaving a lender at the end of the term?

A: To keep competitive on rate.

Like penalty calculation, if the lender knows that you can’t easily leave on renewal by transferring to a different lender, they have less incentive to offer you the lowest market rate.

The only ways out of a collateral mortgage are (1) to Refinance, the mortgage which can lead to expensive legal fees – or (2) to sell the home and pay out the mortgage completely. Almost all the Big Banks use collateral mortgages, and there are thousands of Canadians unaware that they are even in a collateral.

The CBC warns against collateral mortgages in their Marketplace article seen here.

Buyer Beware…

There are several other issues that can come up in mortgage fine print:

Pre-payment restrictions Would you rather have the ability to make pre payments twice per year, or unlimited pre payments whenever you want? This can make a big difference over time if you ever plan on repaying your mortgage faster.
Unfavorable interest compounding Most mortgages are compounded ‘Semi Annually’. Some are compounded monthly. Interest compounding is great if you’re an investor – it helps to grow your money. But more compounding slows down repayment if on a debt, such as a mortgage and leads to more interest expense.
High fixed rates for variable rate lock ins Variable rate mortgages have the ability to lock in to a fixed rate. But what kind of rate would you lock into? This conversation is often avoided, but should be brought up. There is a HUGE difference between the kind of rate you could lock into.

It can be helpful to look at a mortgage is like a long term plan. If your mortgage itself was a ‘Plan’ with positive or negative features, and this Plan would be fixed in for 5 or 10 years or more – What kind of Plan would you like to be on? What kind of features and flexibilities would you like to be able to count on in your Plan over time?

If you can’t predict the future that easily, or how the events will roll out in your life moving forward, having more flexibilities is better than less freedoms and flexibilities. Especially given that mortgages with quality fine print can usually be found with the lowest market rates – it literally pays to do your homework here on what may be your biggest after tax expense.

Given these realities, How is Altrua Mortgage different, and how do they help to save you more?

Altrua Financial takes the bias out of mortgage education and guidance. There’s no ‘advising’ on a high penalty or collateral charge product, just because the rate is a touch lower.  This is because Altrua is paid a standardised, flat fee from the lender. Altrua earns the same no matter what mortgage you select, whether it’s a higher penalty ‘no frills’ or a full feature mortgage. This is not the case for the rest of the Mortgage Broker industry. What’s better, is that Altrua uses its lender commission to buy down the rate to even lower levels. So if Altrua is paid more, then more is invested right into your rate. Get educated, empowered and then decide among your options. It is the most transparent mortgage company in Canada, and is designed to help provide you the ultimate in savings.