Imagine spending hours of your life to:
- research the best mortgage
- negotiate for a better rate
- apply to refinance at a new lender
- answer all the new lender’s questions
- collect all your documents
- get an appraisal
- review all the paperwork
- submit all the documents
- find a lawyer to close the mortgage
- get ready to close
…then be told just five days before closing that your existing lender won’t let you leave.
That happened to a homeowner who contacted us this week.
His lawyer found out he had a “bona-fide sale” clause in his mortgage contract.
A bona-fide sale clause is a fancy way of saying that you can’t leave your lender until the term is up, unless you sell the property.
Yes, lenders are fully within their rights to block you from refinancing elsewhere before maturity…if you agree to it in their contract.
Lenders insert these clauses because people who refinance with competing lenders cost them profit.
Examples of mortgages with bona-fide sales clauses include BMO’s “Smart Fixed Mortgage,” MCAP’s “ValueFlex” and motusbank’s variable rate, among many others.
Most of the time, the lender offers better rates in exchange for imposing this inflexibility. But not always.
Know Your Contract
The client in question told us that he only became aware of his predicament when his lawyer asked the existing lender for a discharge statement. (A discharge statement is a required document on refinances. It gives your lawyer the payoff details on your existing mortgage.)
In practice, lenders must clearly outline bona-fide sales clauses in their paperwork. The problem is, most people simply gloss over the fine print.
Bankers and brokers also have an obligation to explain such clauses — in language you can understand. Most do, but some just don’t. Others may purposely under-emphasize such limitations.
Should You Avoid Bona-Fide Sale Clauses?
The answer hinges mainly on your circumstances and rate.
If there’s a reasonable chance you might refinance before maturity, steer clear.
If not, and if the rate is roughly 15-20 bps lower than you can get on a regular mortgage, these products are worth a look.
Risk is reduced if you deal with a lender that always has discounted rates (e.g., motusbank, MCAP, etc.). In that case, there’s less reason to refinance elsewhere in the first place. So trading off post-closing flexibility for a cheaper upfront rate may be worth it.
In this particular client’s case, his bank quoted him a terrible refinance rate (probably because it knew he couldn’t refinance at another lender). That’s the type of leverage you never want to hand over to a lender.