Over the history of this fine planet we inhabit – only a few species have survived the cataclysmic events of the times. Cockroaches – Crocodiles – and Turtles are some of the hardy ones. I have heard some fine vernacular for my associates at the bank over my career and although cockroaches has been used (to death – hee hee) and predatory type expressions akin to those toothy reptiles – I have never heard a turtle remark. Maybe this is because somehow our carapace covered friend is more akin to the workaday folk. We have only survived the onslaught of the financial elite due to our sheer endurance and the defences we have built up over the generations.
Well the bankers are back at it again. Here are 4 traps laid that in our slow and steady pace we still need to avoid to get to the finish line on our financial journey.
Mortgage Calculator Posted Rates Trap
When shopping for a mortgage – forewarned is forearmed. You do need to know that when you use a bank’s mortgage calculator that they are providing their posted interest rates which are generally 1.5% higher than the best mortgage rates available today. This may seem trivial to some however when we look a little closer, the numbers are telling. On a 250K mortgage, the difference between a posted rate mortgage and today’s best interest rates will cost the borrower an extra $14,000 over the first five years. Do you know why you are leasing a car every five years rather than putting a nice fat down payment on a new one? Well now you know. The bank also knows. Might be why they offer vehicle financing as well.
Variable Rate Mortgage Lock In Trap
Although variable rate mortgages have become less popular over the last 18 months – I am seeing deeper discounts coming back in style. A quick reminder for those who do not know is that many of the big banks have a little clause in their mortgage contract that we need to be aware of. If you are considering a variable rate mortgage – know that if and/or when you do lock into a fixed rate that you will be paying the bank’s posted rates at that time and not their best rates of the day. The difference today is approx. 1.7-2% on your interest rate for the remainder of your term. If you had a 300K mortgage with 3 years left – you will be paying an extra $11,847.24 based on not knowing the bank’s policy. The time to clarify this is before you sign your mortgage documents.
Early Payout Penalty Trap
Another area where the language in your bank’s mortgage contract is cause for deeper disclosure is the early payout penalty. A surprising amount of my clients who are looking to break a bank mortgage are floored by a number much higher than we first calculate. The reason here is that more and more – you are taking your mortgage based on a discount off of the bank’s posted rate and consequently when you break the mortgage – the penalty is not discounted. This is a huge disparity as illustrated above and create artificially high penalties to break a mortgage early. One of the big five banks have been dealing with class action litigation against them due to the lack of clarity in the language surrounding this aspect of their mortgages. This is not an area to leave to chance as the average 5 year mortgage in Canada is broken at 3.8 years according to CMHC.
Mortgage Renewal Letter Trap
Did you know that the majority of bank mortgage renewal letters are sent out at posted rates? Surprised? I know you are not at this point. Even for long time existing customers you receive your renewal letter with an inflated interest rate with an invitation to come into the branch or just sign back and unfortunately most Canadians do just that. This is why the majority of bank held mortgages renew at posted rates which will cost you the consumer $18,000 in additional interest in just 5 years on a $250,000 mortgage amortized over 25 years for a quick example. Ouch!
So will our Turtle make it to the finish line? Or will he just end up another casualty along the road of life. I am comforted by the tale of the hare and the tortoise where although the predatory types of this world work hard to make the race unfair and speed off into the distance – we can count on them to overstep themselves and get cocky to the point of loss. In this case – your business lost to a mortgage lender that will speed you on your way into a successful future. I am here to help you find that perfect mortgage.