Posted: 1 Dec '16

Warning Signs That Your Discounted Rate Might Not Be The Bargain You Were Looking For

Navigating the terms and conditions of your mortgage can be difficult, especially if you skip over the fine print that comes with your agreement. While the offered rate may appear discounted, the reality of the other terms may cost you significantly if you want to move or refinance your mortgage in the future. As your Alberta mortgage brokers, we'd like to point out two warning signs that your discounted rate may not be a bargain at all.

Your Discounted Rate and the Interest Rate Differential

The interest rate differential (IRD) is the difference between your original mortgage rate and the current interest rate that your bank will charge when relending funds. In the long term, this few percent difference may result in thousands of dollars in penalties if you decide to refinance your mortgage to access some of your equity or reduce your monthly payments. IRD exists because, in many cases, your lender expects to make a certain amount of interest on the money they lent you. If your mortgage rate is 4% up until a certain date, usually the maturity date, your lender expects to earn that rate until the maturity. If you decide to payout your mortgage early, the lender is no longer able to charge you interest; thus, they make up for their loss in profit by charging you the interest rate differential. Alberta mortgage brokers will inform you of the penalties and the calculations used before you actually take the mortgage so you are making an informed decision on which rate and term is right for you.

The Collateral Charge Loan

One way the banks make it easier to access more of your equity in the future is to register your financing as a collateral charge mortgage. While this may seem beneficial, when it comes time to refinance, you might be in for a terrible surprise. Collateral mortgages make it more costly and sometimes more difficult to switch lenders if your original bank won’t help you, and can also reduce the amount of equity you can access in your home since the amount they register on title is usually so high. There are still ways we can help you, so if you want to know what your options are, you need to speak with an expert. 

Your Alberta mortgage brokers at Dominion Lending Centres in Edmonton don't want to see you get caught in a tough spot because of the terms in your mortgage financing agreement. Contact us today and let's put together a mortgage that works for you.

Request Mortgage Info