By Nick Holloway

When you are reviewing your mortgage options, it is important to understand the terms and conditions which are contained in the mortgage being offered. Within the mortgage industry in Canada, there is a wide variety of choices when it comes to selecting lenders and products. As a mortgage professional, it is an important step to understand and review all the options available to us prior to providing lender suggestions to our clients, and then taking the time to explain all the details which are contained within the terms of the suggested mortgage. We are frequently moderating these choices for our clients based not solely on rate, but also by looking at what restrictive terms might be included within the mortgage contract.

What is a “No-Frills” mortage?

A “No-Frills” or “Low Rate” mortgage typically indicates the mortgage contract has certain restrictions which you would not typically expect to see in a standard mortgage contract. Certain examples include that full repayment of the mortgage prior to the end of term is not permitted apart from by the sale of your property in good faith to an “arm’s length” buyer, or commonly referred to as a “Bona-Fide” sales clause. Other restrictions which may accompany this same clause might state that once you reach the end of your initial mortgage term, you are only permitted to renew your mortgage to a new mortgage term with the same lender. As you can see, both of these clauses in place systematically restrict the borrower from securing a more competitive rate from the wider mortgage market should they so choose.

What are the benefit of going with a “No-Frills” option?

One benefit you are likely to receive is that the rate offered on your initial term is typically lower when opting for a “No-Frills” mortgage. To put this in perspective, you want to understand what a difference a rate reduction is going to make to what you pay on a monthly basis. So let’s say we are looking at a 0.05% reduction (5 basis points) on a standard mortgage rate per $100,000 of borrowed funds, and want a quick way of understanding this change as reflected on your monthly payment. The reduction per your monthly payment in this scenario is a total of $2.64, so around the same cost of a cup of coffee. With this in mind, you can convert this figure accordingly based on the amount of borrowed funds, then multiplying by each 0.05% change in rate to ascertain the full ongoing cost increase. It can sometimes be helpful to think of what this additional cost is in the same way as how an insurance policy works, which is a premium to protect you for life’s unexpected twists and turns.

Is the trade-off ever worth it?

In most cases, the trade-off for being in a restrictive mortgage will typically not outweigh the rate reduction you might obtain on the initial term, however there might be specific circumstances where the benefit is sufficient to at least have some consideration assuming a full comparison is made. It is important to note that by working with a mortgage professional, we want to understand what our client’s real estate goals are now and going forward. We are here to put in place for our clients a comprehensive mortgage plan which covers all your available options, and also to act as a guide after closing so that we may help our clients in the future.

So in conclusion, if you want to pick up from the grocery store a “No-Frills” tin of baked beans then you do not need to give this much thought, in fact as my business professor told me once, the tin probably comes from the very same factory as the branded variety. If you want a “No-Frills” mortgage, always remember, “Caveat Emptor”.

If you have any questions and want to discuss your own mortgage goals with me, please let me know, I would be happy to be your guide.