Here are three common mortgage traps to avoid.
Mortgage Trap 1: Hidden Fees and Payout Penalties.
Picture this: Everything about the variable mortgage rate you secure looks great, but you realize too late that there are hefty underwriting and appraisal fees. Or, you try to pay out your mortgage, and you suddenly realize the payout percentage is 2.9% compared to 0.99%. That can mean tens of thousands of dollars when you’re talking mortgage amounts.
Instead, make sure you understand all the hidden fees and any payout penalties before you sign with a lender.
Mortgage Trap 2: Cash Back Offers.
Sometimes cash-back really means sign up for a higher rate and get your savings up front. It’s not often you see a cash-back offer with a low rate.
Did you know? 64% of first-time home buyers in Canada chose to use a broker in 2024.
Lenders that offer cash back, don’t simply give away money without any expectations. This is essentially a buy-now and pay-later type of strategy because the lender is giving you money at time to close the mortgage knowing that he will get it back during the term of your mortgage. What you don’t want is to lock yourself into the term because if you ever need to payout the mortgage before maturity, the lender will penalize you and make sure he will get his initial disbursement back regardless.
It looks enticing to receive some cash upfront but know that there is a price to pay. On average, the borrowers break their mortgage after 3.5 years because of relocation, divorce, upsize, downsize, etc.
Mortgage Trap 3: The Bona-Fide Sale Clause.
A bona fide sale restriction—often seen in “low-frills mortgages”— is really a way to say you’re stuck (or trapped!) with this lender until the end of your term or until you sell your home. It also often includes arms-length restrictions when you sell.
Do these traps mean you should never sign a mortgage with these options?
Not necessarily. Truthfully, getting the lowest possible rate is often at the top of a homebuyer’s list of priorities. If you know there is very little likelihood you would payout or leave a lender within your term, then there may be benefits to you. It’s just a reminder to understand all the implications of the fine print when you sign with a lender.
Bonus Mortgage Trap 4: Private Mortgages
When borrowers enter a private mortgage, it is often to access their home equity quickly because they have been declined by their bank. There is often a serious situation that force them into considering this option. They enter the transaction accepting that it is for a short period of time and it is fine because it is what private mortgage should be a short-term solution! The reality is that too often borrowers just never address the root of the problem and they are trap into renewing their private mortgage year after year. They are stuck paying high interest rates and renewal fees every single year, considering that a private mortgage is interest only, principals never decrease. Borrowers essentially are shovelling snow in-font of them.
Related: Watch out for these mortgage scams
Until they address the real problem or sell the property borrowers are in a vicious cycle. Private mortgage should always be a short-term solution and if you renew, it means that the main issue isn’t addressed.
In general, we do recommend you watch out for predatory lending practices which can include any of the above mortgage traps along with:
- Unusually high interest rates
- Vague or misleading loan terms
- Aggressive collection practices
To secure your best rate, contact us today and avoid these mortgage traps.