Even though you may qualify at one of the big banks, there are reasons you should get your mortgage elsewhere. In this article we are going to cover a few of them.
The number one reason is the payout penalty. The big banks have higher payout penalties. Most lending institution uses the higher of 3-month interests or the interest rate differential (IRD). Each of the big banks has their own IRD formula, but in general they take advantage of the posted rates and the rate they gave you to maximize their profits. They call the difference between the rate you got and the posted rate at the time, the discount. They apply this discount to the remaining term of the mortgage when you decide to break the contract. This magnifies the penalty because there is no way you can walk into a bank and get the same discount on a 2-year rate as a 5-year rate. Yet they are applying it to your remaining 2-year term calculation. Lenders whose only business is to lend money out for mortgages have only one rate. So when it is time to calculate the payout penalty it is simpler, fairer and smaller.
Your mortgage broker should have gone through and try to pick the best term for you. A broker should discuss with you your life plan and work plan for the next 5-year to 10 years. Will you be having another child? Is it possible you will be promoted to another location? Will one of you be going back to school? However, no matter how you plan, life happens. And if life happens when your mortgage is at a bank, your life just became more expensive. I think here is where most people can save a lot of money on the cost of their mortgage.
You might think I can skip this by going to variable rates, which only have a 3-month interest penalty when I break my mortgage early. Well, here is the number two reason not to get a mortgage from a bank. The disadvantage of getting a variable mortgage from a bank once again lies with the fact that they have two rates. The posted and the one they give you. When you get a variable mortgage at a bank, you may have fought tooth and nail to get the best rate possible; however if you decide to lock in to a fixed rate because the rates are going up, you are at the mercy of the bank. There is no way they will give you the best rate. They don’t have to. They will show you the posted rate and take a little off. Lenders that have only one rate list will give you their best rate at the time you lock in your rate. Fair and simple, isn’t it?
And finally the number 3 reason not to get your mortgage from a bank: Collateral charges! What are they? They are a different way of registering your mortgage. This in itself can be a lengthy article. Basically, it will cost you more to switch lenders if your mortgage is registered this way. To be fair, this is becoming less and less an argument against the banks because more and more institutions are using it. It is a great customer retention tool. However, there are still mortgage lenders that do not register the mortgage this way. And I say given the same terms and rate, I would definitely borrow from them. This gives me the freedom and choice to go somewhere else at maturity. I might not, if they offer me decent renewal rates. And by having the freedom, it gives the institution reason to offer me better rates.
So people go to the bank to get their mortgage and are mortified when they don’t qualified, like now they are second class citizens if they can’t qualify at a bank. Isn’t it funny that the best deal is not at the banks?
Though we deal with a lot of situations where alternative lending means someone cannot qualify at the bank, but sometimes it is because the best deal is not at the bank.
Alternative Lending.ca helps people get mortgage loans outside of the bank. We are non-bank lending experts. This means we are also experts in second mortgages, home equity loans and private lending. Though our office is in Vancouver, we can help individuals in all parts of BC and various locations in Alberta, Manitoba, Saskatchewan and Ontario. If you have any questions please contact us.
