Mortgage rates are the easiest way to compare the offers given by different lenders. Luckily, we have access to the best rates in the industry along with special promos that the general public does not know about.
However, relying only on rates is tricky. If a homeowner bases their mortgage decisions solely on rates, they may lose the bigger picture. Banks know that a promotional rate will attract traffic, so they aggressively use it as a tool to compete. Banks are also aware that most borrowers are not educated enough in reading the fine print, and they use this to their advantage.
Contrary to what most of us may think, banks and lenders do not make their money out of the interest earned. Sometimes the promotional rates that banks offer are so low that when deducting an inflation rate of 2%, the bank actually loses on the mortgage.
So, now the question is: how do the lenders make money? It is by structuring the mortgage in a way that borrowers pay a high dollar amount if they break the mortgage mid-term.
It’s a known statistic that although most Canadians take a 5-year term mortgage, the average time of holding a mortgage is only 3.7 years. This means that most borrowers do break the mortgage in the middle of their term. Another piece of statistics is that 67% of Canadian break the mortgage and pay very high penalties.
Why do most borrowers break their mortgage? Change of location, change of income, changes in the family, and opportunities in a growing market to save money and have a bigger house are all probable reasons to break.
While a better rate will save you $13/m for each 100K borrowed, a better choice in penalty can save you $20,000. The big money is in the penalty and other terms that are translated to flexibility and overall money saved.
The story behind each mortgage plan is sophisticated and complex, and representing it through only rates is neglecting the power of penalties and the fine print.