- Hey, it's Nolan Matthias from Mortgage360,
and today, we're discussing Clickbait Mortgages.
What are they?
How do you identify them?
And how do you avoid them?
But before we get into it,
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So, let's talk about Clickbait Mortgages.
What are they?
Well, they're that ultra low rate mortgage
that every bank, every lender, every broker has.
They advertise it.
They try to get you to click on it.
They try to get you to apply now.
And it is that ultra low rate
that is obviously too good to be true.
Now, what we find with these clickrate, Clickbait Mortgages,
is that almost every lender has them.
And it's not because every lender wants to have them.
It's because they feel they need to have them,
in order to compete with the discount brokers
and the discount lenders up there.
And that's okay.
But the question is, how do you identify them?
And the way you identify them is really simple.
If it's too good to be true, it probably is.
And almost all of these Clickbait, Clickrate Mortgages,
these ultra discounted mortgages are too good to be true.
They have an ultra low rate,
but they come with product restrictions
and higher penalties,
and things that you just absolutely
don't want in a mortgage.
And when we talk about mortgages,
we talk about the three P's.
The three P's are:
Price, Product and Penalty.
And product and penalty
are always significantly more important
than what the price is.
Because let's be honest here,
a lender who offers a 1.79% rate
when the going rate is 1.99%,
knows that there's going to make money
on the 1.79% mortgage.
In fact, most of the time,
those 1.79% mortgages are more profitable
than the 1.99% mortgages
because of the product and the reduction features,
or the added restrictions that they've put on the mortgage.
So, how does that work?
Well, let's talk about prepayment privileges, for example.
So, most mortgages have 15% to 20% prepayment privileges.
On discount mortgages,
you'll often find that
they have reduced prepayment privileges.
So, maybe it's 10%,
maybe it's 5%.
And the reason why they've reduced the prepayment privileges
is because they know that
if you've got less prepayment privileges,
then you're going to have
to pay that mortgage out slower over time,
and therefore, even at the lower rate,
they're going to earn more interest off of you
because you can't pay it off as fast.
They also know that you can't,
at the time that you wanna pay off the mortgage,
go and drop 20% on the mortgage,
pay out $80,000 on a $400,000 mortgage,
and lower your penalty
because you've reduced the amount of your mortgage.
They're just smart that way.
Banks aren't stupid.
They know how to get you to pay more
over the life of the mortgage.
Lower rate in exchange for less features
is basically a way for the bank to make more money,
not necessarily for you to save money.
Don't forget that.
So, product also comes with other things like restrictions.
Most of the products that are Discount Mortgages,
Clickbait Mortgages,
they have one major restriction.
It's called a Bona-fide Sale Clause.
So, what's a Bona-fide Sale Clause?
It is a clause that prevents you
from paying out the mortgage unless you sell the property.
In other words,
you can't refinance the mortgage
and you can't switch to a different lender
in the event that you can get a lower rate
at a different lender.
So in other words, you're stuck
with the lender that you're at.
Now, in some cases you're stuck at lender you're at,
and you can still refinance there.
But in a lot of cases,
you're stuck at the lender you're at
and they won't allow you to refinance at all.
And that's super dangerous because in times,
especially like what's going on in 2020 here,
having access to your equity
can be really really important
if you need to get money out of your property fast.
And the Bona-fide Sales Clauses prevent that.
It's honestly the feature in a mortgage
that I would recommend people avoid
more than any other feature, or in this case,
I guess it's actually a restriction in the industry.
Now, let's also talk about penalty.
Because oftentimes, with these low rate mortgages,
these Clickbait Discount Mortgages,
you also have higher penalties.
And those penalties can obviously be a pain in the butt
for multiple reasons.
One is because...
One, you have to pay more to get out of the mortgage.
Two, if you wanna switch to another lender,
the key thing about switching
to another lender for a lower rate,
is that the savings on the lower rate
exceeds the amount of the penalty,
and the higher your penalty, the less likely that is.
And the other thing is,
when you go to sell a property,
you wanna be able to pay your mortgage
and have a low penalty
because you wanna actually have the option
to leave the lender you're at when you go to move.
And the reason why is,
because, banks will tell you this all the time,
banks will tell you,
"Don't worry about the penalty.
"You can always port the mortgage
"and you won't have to pay the penalty."
But, they know that once you're moving
and you've got this massive penalty,
that they've got control.
Because the fact that you have a massive penalty
means you're probably not going to pay off the mortgage.
And what that means
is that they can charge you whatever they want.
And banks do this all the time.
They say, "Yeah, don't worry about it.
"We'll give you a really good rate right now.
"And then when you go to sell we'll port the mortgage."
You go to port the mortgage,
you're now getting a bigger mortgage.
And the new money is going to be lent to you
at a significantly higher rate than what you would get
if you're getting a brand new mortgage.
So, penalty matters.
And I think...
I don't know whether it's product or penalty
that matters more, but I can tell you unequivocally,
they both matter more than rate.
So, those are things to watch out for
on those Clickbait Mortgages.
And you know,
the other thing that you'll see
and how you identify these Clickbait Mortgages
is people will say,
"Oh, it's exclusive to us."
"It's a special rate."
"It's a limited time offer."
Those are all dead giveaways for a Clickbait mortgage.
So, how do you avoid these?
How do you avoid this crappy mortgage?
Well, what you do is you talk to an experienced broker
and you say,
"I wanna pay a really good rate,
"but I wanna have good prepayment privileges,
"I wanna be able to leave the lender anytime that I want,
"I want to have a low penalty,
"and I wanna make sure I've got
"the best overall mortgage for me,
"and I'm okay with paying a little bit more for it."
And then you calculate the difference per week
that you would pay for a higher rate mortgage.
So, in a lot of cases,
you've got a lender that's offering 1.79,
or a broker that's offering 1.79,
and the going rates, 2.04.
It's a 0.25% difference.
Well, what's the difference between
the 1.79 and the 2.04?
Usually, it's a cup of coffee a week
per person on the mortgage.
It's really a low cost.
So, when you ask yourself,
am I willing to pay or forgo my Starbucks once a week,
in exchange for a mortgage that has more flexibility,
that I can pay out,
that I can move to a different lender at a different time,
that when I go to sell this house
three or four years down the road,
I'll be able to have some negotiating power,
and be able to move to a different lender,
if I so choose,
and ultimately save thousands,
if not tens of thousands of dollars in the first five years,
let alone the next 20 years, is that worth it to me?
And for most people, the answer is absolutely.
And if it's not,
well, there's not much I can do to help you.
So, that's Discount/Clickbait Mortgages,
a term I just coined today.
Clickbait Mortgages.
I like it.
And if you enjoyed this video, do me that favor,
hit the subscribe button,
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Cheers.