There’s been a lot of talk lately about the latest offer from BMO. It’s the second time in three months that the bank has offered a 2.99% 5-year fixed term mortgage – inarguably one of the best rates you can find right now. But yet so many experts argue against taking out this kind of Toronto mortgage, because it’s a “no-frills mortgage.” So what is a mortgage with no frills? And does a no-frills mortgage automatically translate into “bad mortgage?”
No, a no-frills mortgage doesn’t automatically mean that it’s a bad mortgage deal. What is does mean is that it comes with some restrictions that other types of mortgages don’t have; one of the biggest being that you can’t prepay the loan no matter what. Most mortgages come with some type of arrangement wherein prepaying the loan is perfectly acceptable, although even these usually come with some pretty hefty costs for doing so. But with a no-frills mortgage, you can’t prepay even if you’re willing to pay those high fees. You’re locked into your deal and your monthly payment, no matter what. But that doesn’t necessarily make them a bad thing. It just depends on when you’re buying your home, and how long you’re willing to commit to a mortgage.
No-frill mortgages can be especially good for first-time homebuyers, as it’s this group that generally has the least amount of money to put towards their mortgage. First-time homebuyers are also typically more likely to stay in their home for at least five years, and so may not need to necessarily pay off their mortgage early. Even if a large lump sum is going to be coming in the near future, whether it’s due to a promotion at work or an inheritance, that money can always be saved to pay off the mortgage according to the timeline outlined in the contract.
If however, you’re going into the homebuying process knowing that you’re going to want to prepay your mortgage regularly in order to save yourself money on interest, a no-frills mortgage is probably not right for you. No-frills means no-joke, and you absolutely cannot get out of that contract until its time is up; and you’ll need to live with it whether you like it or not.
Even you’re not sure whether or not a no-frills mortgage is right for your situation, it’s always a good idea to speak to a mortgage broker. A broker will be able to help you clearly see what your financial life will be like for the next few years, and will be able to advise on whether or not a no-frills mortgage will work for you. And, they may also have access to other deals that offer the same good rates, but without the “no-frills” clause.
