The Dangers of Chasing a Low Mortgage Rate

With the era of historically low interest rates lasting far longer than most people ever predicted, it’s hard to believe that Canadian homeowners once paid rates as high as 20 per cent at their peak in 1981. Whether they’re first-time buyers or those moving from one home to another, people are still scrambling to get the lowest rate they can. 
 

However, there’s more to finding the right mortgage than chasing the rates. 
 

“The lowest rate may not be the best mortgage for you,” explains Inder Matharu, vice president of the Langley-based Bayfield Mortgage Professionals, which serves B.C. and Alberta. “The marketplace is more and more competitive, and the focus has become all about the lowest rate. But the lowest rate is not always the best option for the client.”
 

While ads for extremely low rates might grab your attention, it’s crucial to pore over the fine print. Not all mortgages are created equal. People need to take into account several factors, including the loan’s terms, portability, prepayment options and penalties. 
 

“Porting” a mortgage involves transferring the terms from one property to another, allowing you to maintain your interest rate so you don’t incur any penalties to break the contract.
 

“People should be looking at portability of the mortgage,” says Bayfield Mortgage Professionals president Gordon Wintrup. “They may say, ‘We’re happy in this home, but we have one child and in two or three years we may have another child or we may have to bring our aging parents into the home and care for them. Our three-bedroom rancher that has suited us just fine may start to look a little small and we may need a four-bedroom house with a full basement. Let’s take that mortgage with a decent rate and transfer it onto the new house down the street.’ Then when you read the fine print of the so-called lowest-rate special, maybe you can’t move it.”
 

With interest rates at record lows, it hasn’t been uncommon for Canadians to consider breaking their existing mortgage in favour of locking in at a lower rate. Other circumstances can prompt a change of plans, whether it’s divorce, downsizing, job loss or other financial situation. Whatever the reason, you need to consider whether the mortgage with the rock-bottom interest rate is worth it if you end up facing a steep penalty.
 

Mortgage penalties are calculated either as three months’ interest or the interest rate differential, whichever is greater. Where things can get complicated is with the latter and when banks use the posted rate rather than your rate to do the calculation. Instead of using the current rate that most closely matches your remaining term (in other words, the discounted rate that would be available to new borrowers), the lender uses the posted rate to its advantage, and your penalty goes up.
 

“If you had to pay that mortgage out, you really have to look at the penalties on low-rate mortgages because they can be horrendous,” Wintrup says. “A lot of people don’t take this into account, but life happens. Sometimes we’re not prepared for the changes we need to make, and that’s when a lot of the mortgage terms start having an impact. Clients need to know what it’s going to cost to get out of the mortgage because the penalties can be absolutely huge. That should be a factor in decision-making when it comes to looking for a mortgage.”
 

Affordability is another factor, and Wintrup and Matharu recommend using a budgeting spreadsheet available at the Canada Mortgage and Housing Corporation’s website to get a sense of how a mortgage payment will fit within your overall monthly expenses. 
 

“There’s no one-size-fits-all mortgage,” Wintrup says. “But there are lots of competitive options out there.”
 

With a mortgage approval, you may be offered various insurance policies. Be sure to carefully review all the details before signing on.
 

“It’s important to make sure you take the time to understand the type of policy being offered, whether it be a mortgage protection insurance or a life policy,” Matharu says. “You do not have to take the mortgage protection policy your lender offers you and you are free to shop around for a suitable policy. Your lender cannot refuse you a mortgage just because you don’t accept the policy they recommend.
 

“Homeowners’ insurance is pretty much compulsory with any mortgage lender,” he adds. “Once you’ve chosen the property, your mortgage is approved, and you’ve removed subjects, you should see an insurance agent to purchase your home insurance. Your insurance agent will help you make an informed decision on your options and ensure that you have the proper coverage to protect you and your investment.”