Buyer Beware: how rate shopping your mortgage today could cost you big time, tomorrow

There are many ways to manage the cost of borrowing on a mortgage, and rate is certainly one tool in the toolbox. Canada's Big Five banks, however, would have you think it's the only thing. They'll throw a few basis points at you like a clown throwing candy at a street parade.

It's a business model. Sell more product at a lower interest rate. Drive profit through volume.

Rate shopping may seem like a reasonable thing to do. Just know that when a lender leads with rate, professional service and advice will be inferior. As long as someone is around to be nice, answer very basic questions, and get signatures, a lot of borrowers accept this terrible treatment in exchange for the 'best rate.'

Sadly, there's a catch. Or two.

Because the best rate is often the riskiest one. Big banks are relying on the fact that most borrowers don't understand the fine print of their mortgage commitment and the future costs they may be incurring in exchange for a low rate.

These unsuspecting mortgage holders won't discover a problem--or the cost of poor service--until years after they sign a mortgage with their lender. Let's consider one of the biggest risks to signing a mortgage ...

Industry experts tell us that more than 50% of Canadians break their mortgage early, despite best laid plans; this includes a refinance. In a declining rate environment, which we are in now, lenders use something called Interest Rate Differential (IRD) to calculate the payout penalty on a fixed-rate mortgage.

The Big Five use inflated posted rates in conjunction with your 'discount' when calculating the IRD penalty for early payout. Monoline (broker-only) lenders do not do this. This is because they don't use artificially inflated posted rates to market 'discounted' mortgages. The rate is the rate. Therefore, monoline IRDs tend to be much lower.

Payout penalties on a fixed rate mortgage can run well into the thousands, even tens of thousands, of dollars. If there's a 50-50 chance you may need to break your mortgage early, might this factor into your decision to sign off on that 'amazing' interest rate?

I was a real estate agent for over ten years. Believe me when I say that every homebuyer and homeowner sincerely believes they can foretell their personal future. Until something goes wrong. An unexpected job opportunity, baby, divorce, death, financial hardship ... and suddenly you need to break that mortgage you said you were never going to break.

But payout penalties aren't the only thing to look at when signing a mortgage commitment.

There are also what we in the broker biz lovingly call the No Frills Mortgage Product. With a no-frills mortgage, you get a lower rate in exchange for giving up a suite of flexible features you may need later. To get that coveted low rate, you may be signing off on less than favorable terms, such as:

• Reduced pre-payment privileges

• A bona fide sale clause which means no breaking the mortgage unless you sell the house

• Restricted ability to port or refinance the mortgage in the future

• More punishing penalties for early mortgage payout

If you're being offered a super low rate (or 'matching rate'), read the fine print. Ask questions. Consider the quality of the answers you receive. Weigh your financial risk should the future not unfold exactly as planned. Then determine if you've been getting the service and advice you deserve thus far.

A mortgage is itself a purchase decision, and all purchase decisions are emotional ones. It feels good to get a steal of a deal. However, you must set aside emotion and determine exactly what you're getting for the price.

None of this is to say you should never take out a mortgage with the big banks. It means you need to know the true cost of that fabulous rate before signing on the dotted line.

Pro Tip: If your bank says they'll 'match the rate' on a mortgage commitment from your broker, ask the loan officer why they want someone else to do their job for them (for free), before they'll give you a better rate.

Your time, effort and loyalty are worth something.

And sometimes the 'best rate' is too expensive.