When it comes to mortgages, people are obsessed with interest rates.
This is partly due to the industry focusing on rates for so long that it has become ingrained in everybody's psyche that rate is the most important factor.
But rate can be deceptive. What about the hidden fees in a mortgage? Those are the ones that can get you into real trouble down the line if you're not prepared and didn't ask about them up front.
To explain the hidden fees in a mortgage, we first have to circle back and talk about interest rates again. Specifically, the reason most lenders have posted rates and special offers.
Why are advertised rates so high?
If you have ever searched online for a mortgage, you have probably noticed that the interest rates lenders advertise are much higher than the rates they actually offer their customers. These are called the posted rates and depending on the year, they could be as high as 4.5% to 6% for a 5 year fixed mortgage.
Any other rates are usually listed as a special offer, or they may not even be listed at all.
Does anyone actually get a 5 year fixed mortgage at the posted rates? Of course not, everyone knows this. As soon as you speak to a broker or representative of the lender, you're being offered the "special" rate that everyone else gets.
The hidden fee comes down to the penalty for breaking your mortgage.
The average person in Canada breaks their mortgage after 32 to 34 months. This means a large number of Canadians will incur a penalty with their mortgage around the three year mark.
Depending on your lender, you could be in for a nasty surprise. By carrying a posted rate and a special offer rate, the lender is able to artificially inflate the penalty charges for breaking your mortgage!
This is because the penalty rate is calculated using the posted rate and not your actual interest rate.
If you break your fixed mortgage early, you will most likely pay a penalty of three months interest or a mortgage calculation called the Interest Rate Differential (IRD), whichever is higher. The IRD is where the lender uses their posted rate to charge you a massive penalty for breaking your mortgage.
That's why the posted rates are so much higher than the rates you are actually offered, they basically allow the lender to manipulate the penalty they charge without making it obvious to you at the beginning of the process.
Depending on the price of your home, and the posted rate of your lender, this could mean the difference in paying upwards of $15,000 or more!
If you were told the penalty for breaking your mortgage could be a high as 3% or more of your home's value, would you sign up for that mortgage?
What can you do about the hidden fees in a mortgage?
The easiest and first step is to work with a mortgage broker instead of a bank.
No matter how good your relationship with your bank is, you're not going to get access to the same products and opportunities that you would with your broker.
You shop around when looking for a car, why wouldn't you shop around when looking for a mortgage?
Finally, one of the most important points is you need to stop comparing mortgages on just rates alone.
What you should do is ask these three questions when considering any mortgage product:
- What does the interest rate mean in terms of dollars and cents?
- What are the other features of the mortgage such as portability and prepayment privileges?
- What are the penalties for breaking the mortgage?
These three questions will help you figure out if the mortgage is a good option for your situation.
If you rely on just the rate alone, the hidden fees in the mortgage may come back to bite you in the butt down the road.
If you are considering a mortgage where the interest rate is so low that you can't resist, you may be walking into something that you aren't prepared for. Don't make the mistake of just comparing the interest rates, that's when you can get stuck with tens of thousands of dollars in penalties just to save a couple hundred dollars on the rate.
Take the time to consider your options and ask your broker these questions before you sign on the dotted line.
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