Shopping for a mortgage: Whether you are buying a new home, refinancing, or renewing; spending the time and energy to obtain the best mortgage suited to your needs is extremely important. Banks often give the illusion that all you have to do is “get the best rate and sign” and then you can go back to shopping for new furniture, paint colours and all those sexy things that make home-buying or renovating so much fun.
I dare to say that you are smarter than the average consumer. You want more from your mortgage than just a great rate. You want to avoid the traps set out by banks to make profit off of your hard-earned money and get a mortgage that meets your needs, not theirs!
While these seem pretty easy to catch when they are laid out on paper, it’s much harder to know when you’re falling into a “trap” when you’re shopping for your mortgage. Here are a few “bank traps” to avoid:
1)Collateral Charge mortgages
Collateral charge mortgages are registered to the title of your property in a way that you can keep accessing debt in different forms from that bank without jumping through the typical hoops of a refinance. Banks love their collateral charge mortgage because clients will hopefully keep borrowing more and more money (so they charge more and more interest). It also makes it difficult to switch your mortgage to another lender even when your term is up. There are legal costs associated with switching, so once you have signed on the dotted line they no longer have to give you their best pricing.
For more on collateral charge mortgages: https://www.thestar.com/business/personal_finance/spending_saving/2011/07/30/beware_the_pitfals_of_collateral_mortgages.html
2)Teaser Rate Mortgages
CIBC is a big fan of these. They offer a below market value rate for a limited portion of a 4-year mortgage, however after the first 6 months that rate increases to higher than market rates for the next 3.5 years of the term. Sounds insane, right. But people actually fall for this trap. A lot of people (not my clients of course)!
(At the time of this ad you could get 5 year mortgage for 2.34%)
3)Closed fixed rate mortgage at big 5 bank
Now I may get a few phone calls from Managers at these banks after they read this. Especially because so many Canadians get a closed fixed mortgage with a big 5 bank. However, I would be selling my readers short to not explain this. The reason I feel this is a trap is because banks charge MASSIVE penalties if you ever break one of these mortgages before the term is up. Please read more about this in my blog “mortgage breakage penalties” for a detailed explanation of how they calculate these penalties.
I can’t spend all of my time criticizing the big banks. Mortgage Brokerages can be just as evil. Go online, there are lots of brokerages offering horrible mortgages with shiny low rates attached. They offer mortgages with great rates but full of extra fees, penalties and restrictions that end up costing people more money in the end. Read the fine print!
All mortgages are slightly different and my advice is to work with someone you trust to help you navigate through your options and avoid mortgage traps. Additionally the best way to avoid traps is to not get tunnel vision on rate. Bankers and brokers dangle RATE so you don’t pay attention to any of the details. If you think you’re getting a great rate, you’ll likely “sign here, and here, initial here, and sign again here at the bottom” without taking the time to actually read what you’re agreeing to. Before you sign make sure you are fully educated on all the potential “what ifs” and “costs” associated with your mortgage in the long run.
More Wisdom from Harrison: Please take a minute to also read my blog on “How to shop for a mortgage.”
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