In this article I have tried to dig deep into the business of ultra low mortgage interest rates. Let us concentrate on the pure profit and money part. For sometime, mortgages are being treated like a commodity. There is always a reason when someone starts a big-box store style mortgage business. The aim is two fold – first eliminate the competitors and then get all their businesses.
The tactics in these types of businesses are –
- Advertise ultra low mortgage interest rate as bait, knowing very well that not everyone would qualify for that.
- When you get someone who is lured by the advertised rate, check if they qualify for that rate or not. There is a high probability that the person would not qualify. In situations like that borrowers are given with some other mortgage options which are not as good as advertised. Most of the time the borrower will accept the revised rate.
Often the low rate mortgages are tagged with some very difficult options which are not exposed / disclosed properly. I have discussed one such option in this article – Prepayment penalty .
Penalties were never nice things to be served with. Most of the fixed mortgages are closed term mortgages. Even if one is able to prepay the mortgage – Interest Rate Differential (IRD) penalty will be applied at lenders discretion.
The idea is now very clear – cheap money is not really as cheap as it appears to be. If you want to prepay your mortgage before it's term, you must pay the lost profit back to the lender. Although it is always questionable if a lender really looses money or not? I have tried to get some Canadian data but I was out of luck. We have to be happy with some unverified data. I have assumed that there are some facts behind these numbers.
Let us now see why a home owner may want close / prepay their mortgage –
- Loss of job
- Won lottery
- Got a better job elsewhere
- Situation changed
- Want to up-size
- Mother-in-law moved in.
- And More …
I am sure you can come up with a number of reasons by yourself. The statistics on these are non-existing for a reason. The study shows that close to 50% of the borrowers (supposedly) move before end of 5 years mortgage term. Also at the same time a study from a reputed bank says that close to 70% of mortgage stock in Canada is 5-year fixed rate mortgage.