If you are a homeowner shopping for a new mortgage, renewing your mortgage or refinancing, one of the biggest factors on your radar is likely the interest rate. Because the cost of homes in Canada is substantial, the interest payments that go along with paying down the principal amount borrowed can be substantial too.
Lenders are in competition with each other to offer the lowest interest rate that will attract homeowners. One of the ways they can position themselves as having the lowest rate is by offering something called a bona fide sale clause.
Let's look at what a bona fide sale clause is and when it might be advantageous to lock into this type of mortgage term.
What Is A Bona Fide Sale Clause?
A bona fide sale clause is a clause in your mortgage that says you are not allowed to leave your lender until your mortgage term is up unless you sell the property. This means no shopping around for better rates halfway through your term. This also means no refinancing unless you are willing to pay a hefty penalty.
Bona fide sale clause mortgage terms are offered by low-rate lenders like MCAP and Motusbank. BMO also has a product called a Smart Fixed Mortgage that allows for this type of contract.
At this point though, you might be asking why anyone would agree to this kind of contract. What's in it for the homeowner?
Is a Bona Fide Sale Clause Beneficial?
In exchange for this kind of security on the lender's side, the homeowner gets access to an interest rate that is lower than what is being advertised to the general public. This lower interest rate can be in the ballpark of 10-20 basis points meaning you might have access to an interest rate of 2.49% instead of the advertised 2.69%.
A difference of 20 basis points (0.2%) on your interest rate might not sound substantial. However, when you apply that difference to a borrowed amount of $350,000 over a five year term, it can work out to a notable amount of cash left in your pocket.
When To Consider a Bona Fide Sale Clause
Because a bona fide sale clause forces you to lock into your mortgage term unless you sell your property, it's important to know that the potential for breaking your mortgage term is highly unlikely. This requires a high degree of financial stability as well as a willingness to accept the interest rate you get even if rates drop at a later point.
If mortgage rates are extremely low and if you're confident they can't get any lower, this may be an option to consider. This can be challenging to predict, but with the potential of saving a fair amount of money on interest payments, it can be something to consider.
Things To Watch Out For With Bona Fide Sale Clauses
If you're dealing with a low-rate mortgage provider, it's important to pay close attention to the contract you are signing with your lender. It's fair to expect your lender to carefully disclose all the elements within a mortgage contract. However, the process of buying a home and signing mortgage documents can be overwhelming. Sometimes these elements can be agreed upon without fully understanding what you are getting into.
It's important not to rush anything regardless of whether you're taking on your first mortgage or whether you're simply renewing your term. Pay attention and be aware of the conditions on which you are agreeing with your lender.
Is A Bona Fide Sale Clause For You?
As we've noted, a bona fide sale clause can be a helpful thing to consider if you are financially stable and confident you won't need to consider refinancing within your mortgage term. Saving a substantial amount of money on interest payments is always a win for a homeowner.
At the same time, locking yourself into something that can cost a lot of money to get out of can be a huge loss if you ever found yourself in that situation. Consider what you are willing to risk and be well aware of your long term plans as a homeowner.
If you ever need assistance in analyzing a possible bona fide sale clause mortgage, don't hesitate to reach out to one of our mortgage professionals. We would be happy to help you out and guide you through the process if it's right for you.