Mortgage brokers can get you something more important than just a lower interest rate

Laurie Boudreau |

An argument for not getting your mortgage at a bank

A pandemic financial hardship story has revealed the expensive trap built into mortgages offered by big banks.

If you have to get out of a mortgage before it comes up for renewal, expect to pay a penalty to the lender. But penalties differ among lenders, with banks at the high end.

An Ontario real estate agent recently decided to put her house up for sale because her income had dropped as a result of the pandemic. As reported by CBC, her bank said it would cost almost $30,000 to break her mortgage.

As a general rule in mortgage lending, big banks have higher penalties to break a mortgage than alternative lenders you can access through a mortgage broker. Getting the lowest possible interest rate is a top priority in shopping for a mortgage. But breakage penalties must be considered as well, even if you think there’s zero chance of needing to get out of a mortgage suddenly.

The pandemic is an example of the kind of out-of-nowhere event that forces people to bail on a mortgage. This can happen even in good times – you get a job in another city, or become ill and need to move to change your living arrangements.

If you’re buying a home or renewing a mortgage, by all means, ask your bank for its best offer. Then consult a mortgage broker to compare both the rate and the breakage penalty. Your bank may compete on rates, but the high breakage penalty is built in.

Expect to hear more stories in the months ahead from homeowners who have lost their jobs or income in the pandemic and have to sell their homes. Banks have allowed more than 721,000 people affected by the pandemic to defer or skip mortgage payments. When the deferrals end, some people may still be in a financial predicament that forces them to sell.

With surprising agility, the banks presented themselves early on in the pandemic as ready to help customers experiencing job or income loss. The goodwill the banks earned could quickly be undone by soaking financially distressed people who have to sell their homes. Offering some temporary easing of mortgage breakage penalties on a compassionate basis is the right thing to do.

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Rob’s personal finance reading list …

A 12-pack of home insurance discounts

A lot of the home-buying in a typical year happens in the spring, and that means spring is high season for home insurance renewals. Here’s a list of 12 commonly available discounts on home insurance. There’s a good chance you haven’t heard of at least a few of these.

An investor’s tax primer

A useful roundup of how taxes affect dividends, interest and capital gains in various types of accounts. Here’s my ETF tax primer – designed to help investors find the right account type for various ETF sectors.

Ten rookie investing blunders

Your attention is drawn to Number Six on this list – being overconfident. I’m seeing a bit of this among investors who put money into stocks in March and then watched as prices soared. Prepare for possible turbulence ahead.

The cost of working at home might be your next promotion

Looking ahead to a resumption of normal life, Wired reports on how people could be disadvantaged if they work at home and have less facetime with their bosses. Worth a read if promotions and pay raises are part of your financial plan.

Ask Rob

Q: Uncharacteristically, I acted boldly and decisively when the stock market dived in mid-March and maxed out my TFSA with about $40,000 invested in dividend stocks, REITs and ETFs. Most of the money came from a savings account which had been collecting more dust than interest but I also leveraged an unsecured line of credit with Tangerine when my rate dropped to 3.45 per cent. Knock on wood, my current dividends are yielding me about 5.9 per cent and the principal on my loan is about $12,000. I have about $500 per month to either repay the loan and/or further invest in my RRSP. Given the current bear market and low interest rates, how quickly should I pay down my unsecured line of credit loan? I'm inclined to go 10 years maximum though I might be tempted to leverage more money in subsequent years if the bear market/low interest rates continue.

A: I’ll answer this one by revisiting a column I wrote about an investment adviser who boldy borrowed $250,000 in December 2008, a dark time for stocks. He didn’t sell until March 2017.

Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.

Today’s financial tool

The federal government offers this tool to help people find out what financial assistance they may qualify for during the COVID-19 pandemic.

Tweet of the week

Evan Siddall, president and CEO of Canada Mortgage and Housing Corp., takes on those who insist real estate prices can keep going up despite the economic damage caused by the pandemic.

In case you missed these Globe and Mail personal finance-related stories

  • How advisors can help jobless Canadians avoid financial pitfalls
  • Millennials share their top three overrated personal finance tips
  • As mayhem erupts, markets keep moving higher. What are investors thinking? (for Globe Unlimited subscribers)

More Carrick and money coverage For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group. Send us an e-mail to let us know what you think of my newsletter. Want to subscribe? Click here to sign up.

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