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.
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!