Caveat emptor, buyer beware, due diligence -- whatever the term, we all get the basic idea: the onus rests on us, as customers, to understand the product or service we’re purchasing. Canadians usually take this concept to heart when buying big-ticket items like cars, televisions, appliances -- even houses -- but sometimes they don’t do the work they need to when it’s time to get a mortgage. They see a great rate and simply say ‘that’s the one for me’ without paying enough attention to the all-important fine print.
With that in mind, here are six mortgage conditions you should watch out for when you’re taking out or renewing your home loan. When it comes to mortgages, it’s borrower beware!
(1) Prepayment and Lump Sum Restrictions
While it might be hard to believe right now, but you’ll probably want to put extra money toward your mortgage at some point. Some discount mortgage offers have great rates but severely limit the amount you can pay off early using prepayments and lump sums.
(2) Owner-Occupied Only
Do great mortgage rates have you thinking about a rental property purchase? Not so fast -- some of the best mortgage rates out there are only available to buyers who are actually going to be living in the property they are buying.
(3) Minimum Loan Amount
A few lenders dangle bargain basement mortgage rates in front of borrowers only to require a huge mortgage amount to qualify. Canadians with smaller mortgages (and thankfully, less debt) need not apply.
(4) Accelerated Close
Some discount mortgages require very accelerated closings on the property being borrowed against -- sometimes as brief as 15 or 30 days. If you don’t have your paperwork in order or the seller can’t wrap things up on their end in a short amount of time, you’ll be out of luck with this condition.
(5) New Purchases
Unfortunately, some of the best mortgage offers in the country only apply to new home purchases. If you’re one of the millions of Canadians refinancing or renewing your loan, this is a condition you don’t want to see.
(6) Insured Only
This is a more common mortgage disclaimer than you might think. Many of the bargain basement mortgage deals you see advertised only apply to insured mortgages, where you have a downpayment under 20%. Insured mortgages actually have less downside risk for lenders so in general they have lower rates.
**UPDATE: May 3, 2015
A new type of mortgage has been garnering significant attention in Canada over last few weeks, so we’re updating this post. Read on to learn about the 7th mortgage condition we felt compelled to include on this list. Canadians will certainly be hearing more about this one in the weeks and months ahead!
Teaser mortgages offer an enticing, steeply discounted initial interest rate before resetting (usually after a period of six months to a year) to a much higher rate. Reviled by many Americans for helping cause the U.S. housing bust, teaser mortgages have not been widely available in Canada until just recently. Several banks, including CIBC, now offer teaser loans, and with competition in the mortgage market continuing to intensify, you’ll likely see them more often in the weeks and months ahead.
Borrowers should beware of two big things when considering a teaser loan: they should (1) make sure they are comfortable with the size of the mortgage payment once the teaser offer expires and the rate resets (in Canada borrowers must qualify for teaser loans based on the higher, ‘reset’ rate), and (2) they should figure out if a regular fixed rate mortgage might actually be a better deal. Teaser mortgages often charge more interest over the full term of the loan than their fixed rate counterparts, even though the great initial rate makes them look better on paper. Consult a mortgage expert if you aren’t sure -- teaser mortgages are often more gimmick than great deal!
Look for Disclaimers When Comparing Mortgages
While it’s always satisfying to get the lowest mortgage rates possible, sometimes mortgages that look great at first glance come with conditions you either can’t or don’t want to meet.
That’s why at LowestRates.ca, we’re proud of the fact that we allow our lenders to prominently display the conditions attached to their mortgage offers. We know our customers appreciate seeing the disclaimers on the loans they are interested in, before they apply. Sometimes, the best mortgage isn’t necessarily the one that charges the least interest!
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