Many borrowers are focused purely on the rate they receive. Not surprising, getting the best deal is important in our culture and nobody wants to overpay for anything. In banking though, there is no free lunch which means there is a cost to everything. So when you get that rate that is lower than what appears to be the best deal, you need to ask yourself what is the cost of this discount.
One of the hidden costs of that better than best rate can be a clause that prevents transfer of the mortgage. Many borrowers do not keep their mortgage to the end of term and for whatever reason wish to transfer for a better rate elsewhere or refinance to consolidate debt or possibly carry out renovations. Some lenders on their better than best rate products will include a clause that prevents you from transfering the mortgage – effectively locking you into the full term of the loan with that lender. In the event of a sale, you will be able to pay the balance of the mortgage by paying the penalty but you will not be able to move that mortgage to another lender for other reasons.
Penalties are another pitfall in mortgages that give you the absolute best rate possible and also differentiate lenders. As recent news reports have illustrated, some borrowers find unexpected surprises in the amount of the penalty payment in order to withdraw from their mortgage. The Big Six Canadian banks and other lenders use a calculation called the Interest Rate Differential to calculate the penalty. At face value this seems reasonable, the but in this equation it is not the actual mortgage rate that is used to calculate the penalty but the posted rates which are often significantly higher than the actual rate of the mortgage. Many of the banks have penalty calculators online, but you need to use the right rates to get the right estimate and that ”posted rate” buried in your mortgage statement is the root cause of the often surprising penalties.
Their are lenders whose penalty calculation is less severe than others. Are they the right lender for you? Possibly, but you need to make sure that you understand the cost and possibility of withdrawing from your mortgage with a particular lender so unanticipated surprises do not present themselves.