According to the 2016 Mortgage Consumer Survey, 59% of mortgage consumers cited “best rate” as one of the key reasons they chose to obtain their mortgage through a broker (52% said excellent service was another key reason).
What do they mean by “best rate?”
Well if they're not unlike many of the clients I first meet, “best rate” generally means “lowest rate.”
And while its totally understandable that most mortgage consumers would equate lowest rate with best rate, the reality is that you can lose a lot of flexibility and could end up actually paying more.
What Makes a Mortgage Rate Great?
So if the lowest rate isn't necessarily the best rate, what is?
When I consult with clients, I advise them that the best mortgage rate is made up of a combination of the lowest available rate and the features and terms that are important to their situation and goals.
Key features mortgage consumers should consider include:
- What is the penalty for breaking the mortgage early?
- What are the pre-payment privileges (ability to prepay a portion of the mortgage principal before it is due and without penalty)?
- Are they able to access a Home Equity Line of Credit (HELOC)?
- What refinancing options are available?
- What is the rate hold period (locking in of a specific mortgage rate for a certain number of days, usually 120 days, but 90 and 60 day rate holds are also common)?
As the 2016 Mortgage Consumer Survey noted, service excellence was a factor mortgage consumers cited in their decisions to use a mortgage broker.
In real world terms, the importance of excellent service can enter the picture when clients need to access a feature of their mortgage.
So the lender's track record for service is another important factor to consider.
The High Cost of a Low Rate
Low rate products offer homeowners the option to forgo some mortgage features in exchange for a low rate.
So the trade off is…low rates OR features and flexibility that may be important to you (whether you realize it or not at the time).
For example, “low rate” or “no frills” products must be for a 5 year term. That’s great if you plan on living in the home until your mortgage is due in 5 years.
If not, the cost of the prepayment penalty to pay off your mortgage early carries a penalty that is far greater than any “standard” mortgage.
While some lenders will allow you to pay off your mortgage early, some will only allow full repayment before maturity if the property is sold to another purchaser. So if there is no sale, you are stuck with the same lender and same mortgage and you are limited to what you can do.
While some lenders will allow you to refinance during the term, some do not. So what happens if you were faced with an unexpected emergency or family matter and needed money. No mortgage money for you!
The difference in rates between “no frills” and “standard full featured” rates is typically .10 -.20%. But the benefit of that lower rate could be lost, and it could end up costing you more!
Be careful of your choices and be well informed before you make the decision.
How Can Mortgage Consumers Make the Right Decision
While it's impossible to fully anticipate your future financial and housing needs with total accuracy, you do need to spend some time considering your long term goals and needs.
It may be helpful to consider the following questions:
- How likely is it that I may need to move before my mortgage matures?
- What are the odds that I may need to access equity at some point?
- Will I face any issues if I need to renegotiate my mortgage?
- Is a longer amortization better for me?
More specifically, you also need to consider questions around your career – earnings, bonuses, relocation, etc – and your personal situation – relationship status, family planning, home renovation needs / plans, cash needs during the mortgage term.
Finally, if you're feeling a little (or a lot) overwhelmed by everything you need to take into consideration when it comes to getting the “best mortgage rate,” you should really consider contacting a mortgage broker (like me, for instance).
As an independent mortgage broker licensed for both BC and Alberta, I take pride in helping my clients make the best home financing decisions for their situations and goals.
So if you'd like to learn more about how I can help you, please feel free to get in touch by calling me at (604) 854-0337 or filling out my contact form.
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BC & Alberta Mortgage Broker
When I'm not breaking the knuckles of different lenders for better mortgages for my clients - I'm kidding (or am I?) - you can usually find me visiting with friends or family, writing for this blog, or doing my best to keep from capsizing a dragon boat!