Whether you're buying a new or
second home, cottage, renewing, or refinancing, you should make sure that you
consider your alternatives in order to keep you in control during every life
stage and situation. This article by Darlene Hinton of Mortgage Alliance is
timely as many are considering their options.
We’ve been seeing some pretty amazing rates
out there in the past few months. Who would’ve thought there would be a time
when mortgage rates dropped below prime rate for a 5 year term?! While
that is fantastic news for many, for others it could be the case of, “If it
sounds too good to be true, it probably is. . . “ Why? Lack of
flexibility.
Unless you have a
cash reserve, investments, or some kind of monetary back-up, you could find
yourself in a serious situation, really fast. The ultra low rate mortgage
offerings out there are usually extremely limiting. In the mortgage industry,
we call these “no frills” mortgages because you get what you pay for. . .
a low rate and not much else.
To clarify that,
let’s look at what it doesn’t give you. It will not allow you to break
your 5 year term unless you die or sell your home. You are with that bank come
heck or high water. Why is that important anyway, you may ask? Well, did you
know that more than half of Canadians break their mortgage at the 3 yr. mark?
The reasons are usually everyday events that affect us all, at one point or
another. Some of those could be: unexpected illness, injury or accident, loss
of employment, unexpected relocation, or an unexpected large expense (such as a
roof or renovation).
Unless you have
relatively large amounts of money stashed away, you may be stuck in the event
of any of the above occurring. The average mortgage holder has the luxury of tapping
into their home equity if needed, whether that is through their existing bank
or refinancing with another Lender that has the best rate. While its true
most have to pay a penalty to break the old mortgage; if the terms of the new
mortgage are good enough, it will pay for itself with the benefits it offers. Most
No Frills mortgages however, have no option to break the mortgage... period.
(besides death or sale of house)
Another area one
might be affected with the “No Frills” mortgage is if you decide to move. While
you may be able to port a No Frills mortgage, you are generally at the mercy of
the Lender in regards to what rate you will get if you are increasing the
principal amount at all. You’ll notice I have repeated a few points.
That’s because they are very common and really need to be given thoughtful
consideration before you make a decision.The
best way I can put this in perspective for you is give you a literal cost
comparison. Let’s use a 5 yr. term mortgage of $100,000.00, amortized over 25
yrs. to illustrate.
Interest
Rate
Monthly Paym’t Total
Interest over 5 Yrs. Final
Balance at End of 5 Yrs.
2.99
$
472.73
$13,822.13
$85,458.33
3.19
$
483.05
$14,215.81
$85,794.19
Difference?!
$
10.32 $ 393.68 $ 325.86
As
you can see, there’s not a whole lot of savings for what you may be giving up
in flexibility.This
is the guidance and information you will get from your mortgage broker and it’s
free. I hope I have helped clarify a few points for you today.
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