Mortgage shoppers who focus only on securing a rock-bottom interest rate may do so at the expense of flexibility that can sometimes save more money over the long run.
For some products, this means inferior features, but others may come with onerous restrictions and clauses that can limit your options in the future.
Take the bona fide sale clause, for example.
It’s a common restriction on some of the market’s lowest mortgage rates and one that can tie your hands should you need to get out of your mortgage early.
If your mortgage contains a bona fide sales clause, it means you cannot pay out or break your mortgage before the end of your term or unless you sell your house. And even then, the sale must be at “arm’s length” and at fair market value, meaning you can’t arrange a sale to a family member as a workaround.
The clause also applies to those who want to refinance their mortgage, and may prevent them from doing so with another lender before maturity.
The conditions may seem harsh at first glance, but lenders who offer rates with a bona fide sales clause shouldn’t be faulted. The greater restrictions are a necessary trade-off in exchange for obtaining some of the market’s lowest rates.
The lender is reducing its profit to offer a more competitive rate, so it’s reasonable that they want to make sure the client stays with them through to the end of the term. For a lender, an early discharge costs money and would further erode an already small profit margin.
Should you avoid mortgages with a bona fide sales clause?
Not necessarily. There are cases where the buyer may judge the added restrictions as being worthwhile to secure a rate that’s substantially lower compared to other full-featured products.
But that will depend largely on one’s circumstances and the potential rate savings.
If you do consider a mortgage with a bona fide sales clause, you should be sure there’s almost no chance you would need to break your mortgage before the end of the term.
Choose your mortgage products carefully
Before rushing in to a mortgage, it’s important to consider not only the interest rate, but also the features that it includes—or doesn’t include. Products with features such as longer rate holds, more generous prepayment privileges and discount penalties—to name just a few— can often prove more valuable than the initial rate savings after closing.
This is where the services of a licensed mortgage broker can prove invaluable. They can help you assess the pros or cons of any mortgage in greater detail and help find the product that works best for you.