How did this happen? (to me)
It's hard to explain to someone what a mortgage penalty is, or just how painful they can be when you find yourself in a situation to trigger them. Only those that have had to pay the $5900, $8100 or even higher in the past will be able to tell you what that pain feels like. It's what I like to call "Money for Nothin" mortgages, because you get no additional value whatsoever from your bank by paying these big penalties.
Before you say it, I know what you're thinking, I've been there before and "my bank agreed to waive my mortgage penalty because I was borrowing from them again". This is a false premise. Any attempt made to "waive" mortgage penalties end with a similar sum being "blended" into your new mortgage. On the surface, it doesn't feel like a loss, but what they don't tell you is that you end up financing those same penalties for the next 10-25+ years of your life. So, that $6400 you have to pay today, will end up being double that amount over the life of your mortgage. Debt, financed by additional debt does not make one richer, despite what corporate tag lines are trying to sell you.
The lowest rate = the most savings? Right?
The only measure we've been led to believe that mattered was the rate. But this is just one of the many things that needs to be considered when discussing mortgages. Every borrower's situation and needs are different: Full time salaried employee/ hourly wage /commission based/ self employed business owner. Credit/ savings/ debt/ future pension/ no pension, married/ single/ divorced/ kids/ no kids. Just started in the workforce/ retirement on the horizon, etc. All of these situations play a pivotal role in picking the correct mortgage product /lender and rate for your individual situation. To dismiss all of these variables and simply asking "What's the lowest rate?" when mortgage shopping is the equivalent of asking your investment advisor, what's the cheapest investment? It's not a recipe that often ends well.
Throughout the years, if I've heard the I heard the phrase "money is money, I just want the best rate" once, I've heard it hundreds of times. The cruel lesson to learn here is No, money is not money when there are multiple strings attached. We wouldn't borrow for a credit card, a vehicle loan, nor a line of credit if we knew there were going to be serious financial penalties if we paid them back ALL OF THE MONEY they loaned us BEFORE it was due, so why would you ever agree to finance the largest debt obligation you'll likely ever have in your lifetime under these circumstances?
Against the odds...
The stats of early termination on mortgages have long been published, and they have been consistent for many years. However, when I explain to a client that more than 7/10 borrowers will, for one reason or another will "break" their mortgage before the end of the term they look shocked. Not a single 1 of those 7 borrowers ever thinks for a second they would be in the majority. (At least not unless they've been down this road before and have the previous experience to draw upon). I'm willing to bet there's not a single borrower out there right now that signed a 5 year mortgage document, 19 months ago who would have ever thought that today they'd be going through:
A divorce /split (or they've decided to team up with a new partner!)
The death of a spouse/ loved one
Surprise, there's a bun in the oven! (expanding family requires more space)
Refinance to remove debt / household renovations
The sudden loss of a job/ reduced income (pandemic, perhaps?)
The opportunity of a career move in another part of the province or country.
Any number of these life events happen to people every day, yet almost no one ever sees any of these situations ever applying to them, until they do.
Wait for it...
What most people are not aware of is the fact that there are plenty of reputable broker lenders in Canada that won't take you to the cleaners when you need to deal with a life event like this. But if you're one of the people believing you're 1 of the the 3/10 people who will never break their mortgage, it's hard to dismiss the fact that the deck is stacked for you to fail 70% of the time.
Throughout my career, the one thing I've learned, every home owner with a mortgage eventually becomes one of those 7/10 on a long enough time line. It might not be on this term, but over the course of home ownership and a 20+ year mortgage, every borrower will find themselves in a position where you'll need to make a change, and when that day comes, you can either be sitting on the side where the sum of making these changes costs you very little, or on the side where it costs you thousands of your hard earned dollars
The Bottom Line
It's okay if you don't know the right questions to ask. There are no stupid questions, just unanswered ones. The borrowing process should always begin with a consultation to being to understand where you are and where you'd like to go. Many start out with some level of knowledge, while others have none at all. From there, we help bridge the gaps and guide you to make more informed decisions for today, and at the same time help insulate you from life's unexpected events in the inevitable future. The best chance you have to avoid being in one of the above situations would be to seek out a reputable and experienced mortgage professional to guide you in the right direction. You'll find many of us are approachable, highly skilled, insightful and we are committed to offering you more choice and more options that any single bank ever could. The alternative is that you can let your bank sell you their one size fits all solutions which have immense financial consequences attached, and easily lead you into Dire Straits! Make no mistake, they'll be the ones that end up getting your Money for Nothin', (but hey, your cheques are free - as long as you keep a minimum balance of course). Choose wisely.
Mark Norman has been an active and engaged mortgage broker serving the St. John's, Newfoundland and surrounding areas since 2004. He achieved his Accredited Mortgage Professional (AMP) designation in 2006. During that time, he has helped thousands of clients finance homes all across the country. He is an unbiased and educated voice on all things mortgage related in Canada. If you are looking to implement an actual strategy (to avoid situations like above) to your mortgage borrowing, and want someone in your corner that is constantly looking for ways to keep more of your hard earned dollars in your pocket. Look no further. To discuss your situation, you can connect with him via phone (709)743-3939 email: [email protected] or Zoom/Google Meeting
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