June 30, 2015 | Nolan Matthias
The real cost of your mortgageDetermining it may not be as simple as you think
Some would think a rate sheet would make mortgage-shopping process easy. All you have to do is scroll through the list and find the company with the lowest rate, right? After all, pretty much every mortgage is the same? All you need to do is find the best rate?
It's not quite that easy. Not all mortgages are created equal. Behind each of those rates is a set of terms and conditions that affect the price of the mortgage, quite often more than the interest rate itself. In fact, if you put all five of the big banks mortgages beside each other and assumed they had the same rate, the interest rate would be the only thing they had in common. Behind that first page of legal documentation are 20 to 30 pages that have a significant impact on your mortgage.
To put it into perspective, all other goods or services you buy are priced in dollars and cents. A mortgage, on the other hand, is priced in per cent, which is the factor by which the dollars and cents are calculated.
If, for example, you compare a 25- and 30-year mortgage, even if they are both at an interest rate of 2.69 per cent, the 30-year mortgage costs more money.
The interest rate is part of a bigger picture that, along with terms and conditions, will determine the price.
Terms and conditions that affect price include things such as how payout penalties are calculated, the pre-payment privileges and when and how you can pay off your mortgage.
Payout penalties are, by far, the most important item to consider. Often buried in the fine print, the method of calculating a payout penalty can be the difference between a few thousand dollars or tens of thousands of dollars to break a mortgage.
Monoline lenders, which typically deal only with mortgage brokers, often have more favourable payout penalties than their bank counterparts. Coincidentally, they are often funded by big banks and have highly competitive rates.
Pre-payment privileges also play an important role in determining the cost of a mortgage. The lower the pre-payment privileges, the greater the obligation borrowers have to pay more in interest. Lower pre-payment privileges can also mean a higher payout penalty.
Other minor subtleties can also end up costing more money. If you get stuck with a bona fide sale clause, you won't be able to payout your mortgage in its entirety unless you sell the house. In other words, you won't be able to refinance to another lender for a better deal, which could prevent you from saving money elsewhere.
With so many different terms and conditions out there, you can't simply use rate as the sole factor when choosing your mortgage. The only way to really see all of your options is to talk to a licensed professional.
Better yet, call an Accredited Mortgage Professional (AMP). You can find one at Mortgage360.
Nolan Matthias holds a Bachelor of Arts Degree in Economics, is the co-founder of Mortgage360, and the author of The Mortgaged Millionaire.
* This content was produced by CREB®Now's advertising department, in consultation with Mortgage360. CREB®Now's editorial department was not involved in its creation.