Should you Sacrifice Pre-Payment Options for a Lower Mortgage Rate?
Taking a Look at the No Frills Mortgage
If you knew there was virtually no chance of your amassing a pre-payment, moving, or needing to refinance for the next five years, would you give up all of your mortgage options for the lowest rate possible? That is what the No Frills Mortgage offers to home purchasers: the lowest rate available, with no bells or whistles.
The No Frills Mortgage is only offered by select brokers in Canada. The product boasts a wholesale, rock bottom, five-year fixed rate, but very limited flexibility. The No Frills would not allow for large pre-payments without penalty, though it does allow for an annual payment increase option – usually up to 10 per cent per year – and is attainable with as little as five per cent down.
The No Frills can even be bumped up to an accelerated weekly or bi-weekly payment option, meaning you can pay down your mortgage faster with more payment contribution being applied toward principle.
The downside comes if you find that you want to move or break the contract amid your term. However, it can be possible to port your No Frills rate and term to another property without incurring penalty.
Just as it sounds, this is a basic, straightforward mortgage product, geared toward the first time homebuyer who foresees no extra cash stores piling up in the future five years with which to make sizable pre-payments, or the property investor who wishes to maintain their monthly payments at the lowest rate possible. Rates on this product tend to come in at 10 basis points below the best posted fixed rate.
Sounds good – but you’re still unsure if this is really the most optimal product for you, or what those penalties look like? Talk the No Frills over with your broker, and weigh the pros and cons.