Busted! Don’t Believe These Mortgage Myths!
Buying a home is one of the most expensive and life-changing decisions you’ll ever make. Therefore it’s essential to do your research during the home-buying process and find the right mortgage plan to finance your dream home. To learn more about your financing options, you will need the assistance of a mortgage agent. A mortgage agent will make the mortgage process as simple as possible for you and will walk you through each step of the way, ensuring your unique mortgage-related doubts and questions are addressed.
Unfortunately, when it comes to mortgages, there is a lot of misinformation about what you should or shouldn’t do when applying for a mortgage. Believing in this misinformation could prevent you from acquiring a great mortgage deal. To help you separate facts from fiction when it comes to obtaining financing for the home of your dreams, Mortgages with Gary has debunked three of the most widely believed myths about mortgages.
Myth 1: A mortgage pre-qualification and a mortgage pre-approval are the same
It is crucial to be aware of the differences between the two going forward. A mortgage pre-qualification is generally a quick, simple process. You provide a mortgage lender with personal financial information, including your income, debt, and assets. Based on your unconfirmed information, the lender will give you a tentative assessment of how much they would be willing to lend you towards a home purchase. A mortgage pre-qualification can usually be done over the phone or online. Also, a mortgage pre-qualification is not a guaranteed loan.
A mortgage pre-approval is a process where a lender actually checks your credit and verifies your financial information. If you are pre-approved, then the lender will make a commitment (subject to conditions such as a property valuation) to loan you money. The benefit of a mortgage pre-approval is that there is no estimate, and you are being informed of exactly how much you can afford.
Myth 2: My bank will give me the best mortgage rate
On the contrary, banks profit from customer loyalty because loyal customers “shop around” the least. Most lending institutions generally offer their “posted” rates first, which are significantly higher interest rates than what they are willing to negotiate. Mortgage brokers are given wholesale rates due to the volume of business they bring to the lenders.
It is important to remember that a mortgage broker works for you. The bank doesn’t. The value of a professional mortgage broker comes from having someone who objectively works for you and is not limited to mortgage product offerings from one source, like a bank.
Also, mortgage brokers can give great advice on choosing the right mortgage option, considering interest rate, payment privileges, payment penalties, long-term savings, and much more.
Besides, mortgage brokers provide expertise and choice at no cost to you as we are paid by the financial institution that funds your mortgage.
In summary, you will never have to worry about a better mortgage on the market. You will have it!
Myth 3: I can change or end my mortgage at any time
Life is full of unexpected events! For example, you could be three years into a five-year mortgage term and suddenly get the job offer of your dreams in another city or country. To make a move, you may need to sell your home and end your mortgage early.
‘Breaking your mortgage’ can result in a financial cost. When customers pay out a mortgage that is not open to prepayment before the end of the term, the lender will usually charge what is known as a prepayment charge.
Most Canadians choose a five-year fixed term mortgage as it is the most competitively priced mortgage term in the industry; however, statistically speaking, approximately six out of every ten Canadians that hold a mortgage break their mortgage on average during the thirty-eighth month of their term.
Committing to a fixed-term mortgage for five long years exposes people to the most insidious aspect of residential financing, which is prepayment charges.
The Big Six Banks typically have the highest mortgage penalties associated with fixed-term mortgages, while mortgage finance companies offer the best solutions for calculating mortgage penalties.
A fair-penalty lender calculates its standard prepayment charges, for lack of a better word, “fairly.” It does so by comparing your actual mortgage rate to a rate equal to (or close to) what it charges new customers for a time frame similar to your remaining term.
Unlike the Big Six banks, fair-penalty lenders don’t use arbitrarily inflated rates (posted rates) in their calculations. That only serves to drive up penalties.
So you may be asking yourself, why doesn’t everyone get a mortgage with a fair penalty lender?
Many people are conditioned to pay more for big bank financing. Among other things, they trust the brand, like the convenience, or like knowing they can walk into a branch to talk to someone if there’s ever a problem (although, for most people, mortgage problems after closing aren’t too common). Unfortunately, the cost of that convenience is steep.
A Simple Example
Suppose you are a major bank customer with a $300,000 mortgage at a rate of 2.69% (initially a five-year fixed term mortgage) taken out thirty-eight months ago.
Now imagine you:
a) Need to consolidate debt into your mortgage.
b) Want to break and renegotiate to a lower rate.
c) Have to break the loan early for some other reason, maybe because of a loss of income, divorce, inability to get a fair rate from your bank on a “port and increase” (that’s where you move your mortgage to a new property and increase the loan size), or inability to qualify for a port.
In these scenarios, one popular bank would charge you an interest rate differential (IRD) penalty of roughly $10,409.18 to exit your existing mortgage.
Compare that with a “fair penalty lender” with an interest rate differential (IRD) penalty of $2500.00.
That is an astronomical difference!
Many determined mortgage shoppers focus simply on rate and will do anything to save even a tenth of a percentage point off their rate. Most mortgage borrowers are not aware of the hidden costs associated with their mortgage until after they have broken their mortgage.
The time has come to heed this lesson as borrowers. Big-bank IRD penalties clearly overcompensate banks for the legitimate expenses they incur when a customer backs out of a mortgage early. The more people demand fair penalties, the more pressure it will put on Canada’s six biggest lenders to change their methods.
If you’re looking to steer clear of mortgage myths like these, reach out to Mortgages with Gary. As a one-stop solution for all your mortgage needs, we offer a full-range of services for first time home buyers, repeat home buyers, self-employed buyers, clients with credit challenges as well as newcomers to Canada.
We extend our service to clients across Windsor, LaSalle, Amherstburg, Kingsville, Leamington, Tecumseh, Essex, Lakeshore, Chatham-Kent, London, St.Thomas, Strathroy, Sarnia, Woodstock, Brantford, Stratford, Kitchener, Waterloo, Cambridge, and all over Ontario.
With an extensive background in creating wealth and managing risk, we provide mortgage financing for debt consolidation, renovations, vacation properties, investment properties, reverse mortgages, and commercial mortgages.