It pays to check the fine print on low-rate offerings

Here's an article I read that makes a lot of sense.

It was a top news story last week. One of the major banks offered the lowest five-year fixed interest rate in Canadian history at 2.99 per cent. As a licensed mortgage agent, I had to quickly attain as much information as I could on the actual contract before I could recommend it to my clients. You know the old saying “if it is too good to be true …”

My research revealed that many of these low-rate mortgages have such restrictive contracts that they could get you into trouble down the road. Before you sign up for that great rate, make sure you are not signing up for something that could handcuff you financially down the road. You need a mortgage that will be flexible should you experience life changes. I have seen many clients brought to the financial brink because of the penalties and restrictions written into their mortgage contract.

Work with an expert and check under the hood. Not all mortgage contracts are created equal.

One of the scariest mortgages created in the last two years by the major banks is what mortgage broker’s are nicknaming the “mousetrap mortgage.” Mousetrap mortgages are so named because once you are in, you are trapped. The cheese is the initial great rate, but the trap comes in the form of extremely restrictive charges in the contract. I call them Hotel California mortgages because “you can check out anytime you like, but you can never leave…”. The technical term for a “mousetrap mortgage” is a collateral mortgage.

Unlike the traditional mortgage, which uses the property as security and will lend out up to 95 per cent of the home’s value, the collateral mortgage is a loan that is attached to a promissory note and is backed by the collateral security of a mortgage on a property. Because the security on a collateral mortgage is a promissory note with a lien on the property, the lender is free to register as much as 125 per cent of the value of the property, even though they are only advancing maximum 80 per cent to the borrower.

It is similar to a revolving line of credit allowing borrowers to increase their loan without the inconvenience or cost of refinancing. How nice. You have an amazing rate for the next five years and you can conveniently refinance anytime.

The major caveat with collateral mortgage is that the lender is free to change the interest rate on the contract under certain circumstances. Something as small as a missed or late payment can trigger an interest-rate increase. Some contracts are so restrictive that changes to your debt held with other institutions can also trigger an increase in rates of your mortgage contract.

One of these low-rate mortgages states that you must remain with the lender for the five years of the contract. As long as you stay with them you can refinance, and they even state that if you move, you can take their mortgage with you to the new property. But what are the conditions? Will a refinance with them trigger a change of rate? Will a port of your mortgage to a new property trigger a rate increase? What happens to your mortgage if you need to get a car loan with another lender? What happens at the end of the contract? Are there penalties if you don’t renew with them? These questions need to be asked.

It is imperative that you ask the right questions, get independent legal advice and have a licensed mortgage agent thoroughly go through the contract with you in detail. Your mortgage agent should be able to answer your questions by referring directly to the contract. While the big banks will offer to cover legal fees if you use their clearing house, I would suggest contacting your lawyer and paying to have them take a second look.

For most people, sticking it out for five years is not a big deal; especially at 2.99 per cent. But you never know what life might throw at you. You may experience a divorce, or get a job transfer or need to refinance so you need to be very clear about what will happen to your mortgage should you need to make changes. Remember costly surprises will wipe out a lot more than a few points of interest savings.

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We never want to imagine a change in our lives negatively that would make us need to redo the mortgage in the less than five years, however, in my 7 years in doing mortgages, it's very rare that a mortgage goes to term due to something in life coming up. Just today I had to turn away 2 people asking for a second mortgage (to buy a thriving business and to pay a lawyer for a divorce) and both were denied due to a collateral charge registered on their mortgage eating up any available equity. Life changes!

Locking in your legacy

Small read, yet good....

If you are going to leave a legacy that impacts people, there is something that you are going to have to come to grips with:

You are going to die.

What? What kind of motivational tool is that? Real inspiring!

Actually, it is. Our mortality may perhaps be the ultimate inspiration and motivation! If we lived on this earth eternally, we could be procrastinators extraordinaire! We would never have to get anything done because there would always be tomorrow. But alas, we pass on and all we leave are the memories and the lives of others we affected while we were here. Sounds gloomy? In actuality, it is exciting! You see, this gives us purpose—and a deadline (pun intended).

We can choose how we will live on in the hearts and memories of others. We do this by purposing to live NOW in a way that makes change happen not only within us but also those around us.

What kind of legacy will you leave? How will your family and friends remember you? How will you leave your descendants in the following areas? Give some thought to them and make some changes. In doing so, you will begin to lock in your legacy.

Below are some subject areas that that I hope will cause you to think—really think—about how you can leave a legacy.

Emotionally
Have you ever stepped back and asked yourself how you treat other people and how that affects them emotionally? I have four children. I am acutely aware that they are being shaped emotionally by how I treat them and teach them how to deal with the world. I am especially aware of this from my own background. I can directly trace my emotional shortcomings to the emotional coolness I felt from my own family. Are you raising emotionally healthy kids who are both independent as well as interdependent? Are you helping your spouse to grow emotionally? Give this some serious thought.

Spiritually
In my mind, the "God" question is the most important. You know, I often hear people say that they are just going to let their kids "figure it out on their own." These same people will show them how to shoot a basketball, trade stocks, and build a tree house, all simply temporal issues, but then leave the answers to the most important question up in the air! Now I am not advocating cramming anything down their throats, just taking the time to help them find their way. Are you helping and encouraging those around you to find their spiritual life? Are you living an authentic spiritual life that will be your legacy? Give some serious thought to this.

Physically
Now I know what you are thinking: I can't change my genes. We got what we got and we have to live with it. To a certain extent this is true. I am 5 foot 11 inches tall for the rest of my life. I will never be 6 foot, and neither will my kids. What I am talking about though, is to be examples of taking our physical health seriously. The statistics prove that whatever bad habits you have, your kids are likely to do them as well. Why? Because you are their example. This is why I work to stay physically fit. I work out. I lift weights. I eat right (most of the time—I am a sucker for Breyer's Vanilla Bean Ice Cream). I don't smoke. I want to leave a legacy of good health for my kids. True, they can still go astray, but I will do my best to give them a good example to follow. Give this some serious thought.

Financially
There are two primary ways you can leave a financial legacy. First, teach your loved ones about how to handle money (some of you may first need to learn yourself). There are just so many good books on the subject that there is no reason for not knowing how to handle money. "Rich Dad, Poor Dad" is a good book to start with, or perhaps "The Millionaire Next Door." These will teach you the basics. Secondly, you can leave an inheritance. Now let me be clear on this. This does not have to be after you die. In fact, the more you have, the more I believe you ought to give away while you are alive. Let's face it, the older you get, the less need you have for money once the basics are taken care of. It always cracks me up that by the time you can afford a big house, your kids are gone and you don't need one! Turn the money over early so you can watch the joy of your loved ones spending, investing and giving it! This is of course predicated upon the assumption that you have first taught them how to handle it. If you have, then you should give it away while you're alive so you can enjoy seeing your legacy in action! Give your financial inheritance some serious thought.

Relationally
What kind of legacy will you leave in regard to how you interact relationally with people you know? When people look at how you interact with others, will they be better off if they develop the same relational habits? Will your legacy be one of love, patience, kindness, faithfulness, gentleness and forgiveness? Give the idea of influencing others relationally some serious thought.

Intellectually
I don't know about you, but I want to challenge people to deeper intellectual thought. In a day and age of "People Magazine" mentalities, we need people who will challenge us to think deeper. Are you doing anything that will challenge your sphere of influence to intellectual gains? Will those left after you are gone say that you made them think in ways they hadn't before? That you challenged them to be smarter? Give this issue some serious thought.

Functionally
Functionally? Yep. It's a catchall word. It is how you function. How will those you influence actually function? This is to a great degree how you function. Are you well-rounded? Are you balanced? Do you keep the main things the main things? Is your life functioning well? Make it your goal to live a balanced, functional life so you can leave a legacy of such. Give your life function some serious thought.

Follow up on the BMO as I missed two important factors!

There's two other reasons that this mortgage at BMO may not be a part of your strategy.

One being, that you can not register their line of credit product in behind it. Making you search else where for it or making you take an unsecured line of credit at much higher rates.

The other is that the register their mortgages as collaterall mortgages. Read here and here on why these mortgages may not be for you.

Don't get me wrong. This product may be for some. You must allow us a chance to sit down and see if it is or not!

Another small story on the collaterall charge mortgages. I just recently finished one up with a client who needed a private mortgage to finish some renovations on his house. Since his big bank mortgage was registered as a collaterall charge with a very high global limit, we were unable to do anything until the client refinanced his existing mortgage going from a deep discount off of prime to just prime on the variable. He paid a full penalty too!

As a mortgage planner and educator, I have to make sure I know and understand every product out there. You have to trust that I am on your side and do what it takes to make sure you have the lowest cost of home ownership....not just the lowest rate.

Read the fine print - May not be as good as it looks!

Today BMO came out with a five year fixed rate promotion of 2.99%. This may sound good, however, don't be too fooled as this comes with many restrictions.

-You can only discharge this mortgage with a bona fide sale of your home
-You can refinance into a new BMO product down the road, however, no guarantee you'll receive best rates at the time
-Maximum amortization is 25 years. Which is not bad, however, as a cash flow strategy having the higher amortization could be a better strategy
-Lower pre-payment priviledges
-No skip a payment option
-Only once per year can you make a lump sum payment. You should be able to as often as you want

In the end, you can not determine your mortgage simply based on pricing. If it's too good to be true, it usually is. With these limitations savings of interest can be hard.

Here's a post from an industry blog that sums it up:
"I don't see what's so insane about this offer...What concerns me are the myriad of restrictions that are attached to the offer. The homeowner is essentially shackled to BMO for 5 years. You can't even discharge this mortgage unless an arm's length sale of the property takes place or you refinance into another BMO product. Suppose you have to refinance two years down the road, would BMO put in writing that you'll receive their best rate at the time? With lenders like ING, MCAP, LBC I know I'm getting best rates. Can the same be said for BMO?

Not saying this offer doesn't have its merits because the pricing is quite attractive but when you look at all the strings that are attached, and considering that it is a time-limited offer, I think it's more about breaking the psychological 3% level (well, by .01%) rather than offering anything of significant value. Low rates are great but what people need are strategies. Unfortunately there's not much strategy that can be done with such a restrictive mortgage. It may indeed work for some but clearly not everyone..."