Mortgages Are All About the Numbers

Getting the best mortgage is not only about securing the lowest “nominal” interest rate that many of us tend to get obsessed with. As a matter of a fact, it is about the rate, but also about the length of the contract, the cost of exiting the contract… it is about prepayment options, set-up and administration fees and all other details that amount to your net cost of borrowing. It is important, and you should be informed about it. Don’t let a ‘low rate’ end up costing you more in the long run!

Checking different websites will give you access to the lowest advertised nominal rates currently available on the market. Guess what? Most mortgage brokers can offer you those rates as well, if not lower, but they don’t advertise it because most of these rates have restrictions that can seriously impact you in the long run. Prepayment restrictions, higher penalties, approval conditions – the list goes on. Not saying some of them are not right for you, but you have to check the fine print, understand the risks and make an informed decision.

Let’s look at a scenario. You are looking to build a new home and need construction financing. A major bank offers you a relatively low rate.  However, most major banks have very tight rules about advancing money, about the intial installments, and they typically require that you stay with them up to one year (at least) after completing the property. Penalties for breaking the mortgage can be high too. This can be quite frustrating and costly, especially if you are looking to flip a property for profit.

Now compare this to using private funds to construct your property.   At first sight, higher interest cost (in the range of 10% or so) may seem too high compared to what the bank offers. However, when you consider that you will be approved much easier for private funds, that your advances will be obtained much easier, that you won’t have to pay penalties for breaking a contract at the end of the construction – you will see that the alternative is very attractive, if not financially better.

Besides, don’t forget that mortgages are all about the numbers… You will be borrowing money in installments, paying interest only on what you owe, for its duration. For example, your first installment will be running for some 6-7 months, while your last installment only for a couple of months.