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27 Jun

All Mortgages are NOT Created Equal

General

Posted by: Lyle Green

We know that people are different. Some are tall, and some are short. Some are black and some are white. We have many different cultures and ethnicities. We also know that clothes are different. What you can get in terms of style and quality from stores like Nordstroms or Holt Renfrew is much different than say Walmart or a Thrift Store. Food as well is not the same across the board. Would you rather have a meal at a place like Hawksworth Restaurant or at…. McDonald’s? This all seems pretty obvious to most people and would be considered common knowledge. However, for some reason, when it comes to mortgages, people assume that they are all the same. They assume that all the banks offer the same terms and that there is no difference between them except for the rate. Well, they’re not. Aside from the clear differences of rates and choosing between fixed and variable, there are other differences that should be know.

1. PREPAYMENT PRIVILEDGE – Lenders have differences in how, and how much, they allow a borrower to pay down their mortgage without a penalty. Most lenders will allow you to pay a percentage of the principle mortgage amount per year in addition to your mortgage payments. The percentage ranges from 10% to 15% to 20% of the principle mortgage. Some will also allow you to increase your payments by the same percentages. There are a few that will allow you to do even more. They allow you to double your payments, which enables you to pay down the mortgage even faster. If you’re a salary plus commission or bonus employee, or you get a large tax return each year, this could be an important factor in the mortgage you choose.
2. PREPAYMENT PENALTY – If you need to sell, or move, or refinance your mortgage this is an important component. There is a huge difference between lenders when it comes to the prepayment penalty. It basically breaks down into two groups: Monoline lenders and the rest, which are Banks and Credit Unions. When it comes to the penalty for breaking a variable rate mortgage, there is no difference. They all charge a 3 months interest penalty. However for a fixed rate mortgage, it’s a much different story. They charge the greater of 3 months interest or the Interest Rate Differential (IRD). The IRD is the difference in interest that the lender looses when giving you a new mortgage. The way it’s calculated with Banks and Credit Unions produces a much higher penalty than with a Monoline. So if you are going with a fixed rate mortgage, you may want to think about using a Monoline lender.
3. COLATERAL CHARGE – This is a way that some lenders register the mortgage on your home. With a collateral charge mortgage, the mortgage can be registered for an amount higher than the actual mortgage. Doing that, theoretically allows the borrower to obtain a home equity line of credit in the future for no charge. However due to the collateral charge, it makes it more difficult, and costly, to leave the lender for a better rate down the road. That retention ability is the main reason some lenders use the collateral charge. Another point to consider, if you have other products from the lender (credit cards, line of credit, etc..) and you default on them, they can come after your home. With a collateral charge the lender can tie-in other debts you have with them into your mortgage. So defaulting on those debts is like defaulting on your mortgage. Not a good situation.
4. PORTABILITY – This is the ability to move, or transfer your mortgage to another property if you buy another home. Having the capability to do this can save you thousands of dollars. Otherwise, you would have to break your mortgage which would incur the prepayment penalty. As I’ve previously discussed, with certain lenders that could be a hefty amount. Porting your mortgage allows you to avoid that cost. The downside however, is that if rates have gone down, you are tied into paying a higher interest rate than what is currently available. Due to that, in some cases it is better to absorb the penalty and break the mortgage to take advantage of the better rate. The overall savings is worth paying the penalty to get the new mortgage and rate.
These are all factors that you should consider in addition to the rate you may get. Your personal plans and desires should be discussed with your mortgage broker when deciding what mortgage is most suitable for you. If you don’t, you may have to live with some remorse, and have the thoughts of “what if” floating around in your head.