Did you know not all variable mortgages are created equal?
Even if they look the same from the outside with the same rate there could be important factors that will affect the overall cost of that mortgage.
How could that be? Well there are different types of variable mortgages. Some have restrictions, different prepayment options and different compounding.
Things to watch out for:
- bonafide sales clause: some no frills mortgages have a greater rate discount however the only way to exit that mortgage is to sell your home. Some allow you to only refinance with that lender which might not have the most competitive rate or product at that time
- additional discharge fee: again they may have a better rate for display but there are some no frills products that will tag on a 2.75% fee on the mortgage amount if you break the mortgage early. 6 out of 10 break their mortgage after 3 1/2 years. So this could be costly. A typical non restricted variable mortgage payout penalty is 3 months interest.
- lower prepayment options: with most mortgages you are allowed to apply an extra 15-20% per year prepayment to the mortgage. Most of them have flexibility on how you do this as well. Some of the restricted variable mortgages only allow 10% and only on the anniversary.
- interest compounding: you could have 3 different lenders with the same variable mortgage rate, yet they all have a different effective rate because the way they are compounded:
- lender A: compounds the interest semi-annually in advance which is the most cost effective
- Lender B: compounds the interest monthly in advance (typically most of the Big 5)
- Lender C: compounds the interest according to your payment frequency. Example: if you change your payment to biweekly accelerated to pay down your mortgage quicker, the lender will now compound your interest biweekly. Sneaky I know. We know of at least one major bank that’s doing that.
When you get your mortgage through a licensed mortgage associate this will be disclosed up front as we are accountable to our regulators. This is not the case for customer service reps facilitating mortgages at branch level. So you have to make sure you really read and understand the small print as some of the details explained above.
Making sure you are in the right mortgage product is crucial. You don’t want to find out you got the lowest rate but it cost you $15000 to break the mortgage 3 years down the road.
You don’t plan to break the mortgage! Most people don’t yet 6 out of 10 do. Life happens: divorce, job change, job loss, transfers etc). Life is variable so should be your mortgage!
You say this sounds really complicated. Well it can but it doesn’t have to be.