No-Frills mortgage products typically offer a lower interest rate when compared to full-feature mortgage products. The lower rate is really the only perk. Here’re some drawbacks to a no-frills mortgage product.
Potential Lack of Portability
No-Frills products may not let you take your mortgage with you if you purchase another property before your mortgage term is up. Having a portable mortgage allows you to transfer your mortgage and rate to the next property, resulting in no mortgage penalties when you move.
Higher Set Payout Penalty
In some cases, you may have to pay more than the standard three months interest or Interest Rate Differential penalty.
Minimal Pre-payment Privileges
No-Frill mortgage products reduced annual pre-payment amounts by 0-20%. Standard annual pre-payment privileges are 20%. There can also be restrictions on how many pre-payments you can make in a year on a no-frills mortgage.
Minimal Payment Top-up Options
No-Frill mortgage products reduced annual payment top-up amounts by 0-20%. Standard annual payment top-up privileges are 20%.
Quick Close Deadlines
From the time you make an offer until the closing date, typically can’t exceed 30 days. Most people generally set a closing date 30 to 45 days, giving them ample time to prepare for their move.
No Mortgage Pre-approval
By obtaining a mortgage pre-approval, you get a guaranteed mortgage rate. Depending on the lender, it can be guaranteed up to four months. This is extremely beneficial if rates increase. A mortgage pre-approval isn’t always an option with a no-frills mortgage. Therefore a rate isn’t secured.
Bona Fide Sales Clause
This is a fancy way of saying that you can’t leave your lender until the term is up on your mortgage or you sell the property. It can also restrict you from refinancing elsewhere before maturity.
No-Frill mortgages are ideal if you don’t plan on using the benefits and added flexibility a traditional mortgage product offers. It’s important to remember that a lot can change over the course of five years — or whatever term you choose for your mortgage. Take the time to understand the fine print of a no-frills mortgage and if it fits with your financial goals.