You’ve probably seen some ultra-low rates from mortgage brokers on rate comparison websites. Many of those rates (not all) are low-frills mortgages. That means they have restrictions in exchange for a lower interest rate.
One restriction that commonly pops up is the “bona fide sale” clause. We’re about to tell you what this is and when you should care or not care.
But first, let’s face the facts. For the majority of shoppers—75% according to a recent RATESDOTCA survey—getting the lowest rate is a key consideration when shopping for a mortgage.
But successfully securing the lowest rate doesn’t help you if you end up paying more for some other reason. Low-frills mortgages can be great savings options for the right kind of borrower. For others, their restrictions can prove costly, often wiping out any upfront rate savings, and then some.
Several years back, a few lenders started adding bona fide sale restrictions to their mortgage contracts. These clauses are one of the more restrictive mortgage conditions you’ll come across. If your mortgage includes a bona fide sale clause, pay close attention.
A bona fide sale restriction is really a fancy way of saying you’re stuck with your lender until the end of your term, or until you sell your home.
Not only that, but if you sell, it must be an “arm’s length” sale and generally at fair market value. In other words, you can’t arrange a sale to a family member to escape the mortgage.
That may sound scary, and it is if you really need to refinance elsewhere before your mortgage matures. Most people don’t, but many do.
Consider that the average 5-year fixed mortgage lasts just 3.8 years. Almost half of all 5-year borrowers don’t make it to maturity, often because they end up refinancing or renegotiating their mortgage.
Those wanting to refinance their mortgage with a new lender to secure a lower rate would be out of luck if they signed a bona fide sales clause.
Lenders often include a bona fide sale clause when offering aggressively competitive rates. It’s a way to ensure a customer stays with them for the duration of the term. That’s important because early discharges cost lenders money, and ultra-low rates require lenders to shave every possible cost.
Examples of mortgages with bona fide sale clauses include BMO’s “Smart Fixed” mortgages, CMLS’s Rate Advantage products, MCAP’s “ValueFlex,” and motusbank’s variable rates, although there are many others.
For prime mortgages where the borrower is reasonably well-qualified (good credit, provable income, etc.), bona fide sales clauses usually only apply to 5-year fixed and 5-year adjustable rate (variable) mortgages.
For non-prime mortgages, bona fide sales clauses can apply to any term: 1-year, 2-year, 3-year and so on.
Not necessarily, but it’s really a question only you can answer depending on your five-year plan and your comfort—or discomfort—with such a restrictive clause.
Are you willing to commit yourself to your lender for the duration of your term in exchange for a mortgage rate that's about 10-20 basis points lower? A 10-bps savings is $1,330 on the average Canadian mortgage of $286,669.
But if there’s very little likelihood you’ll need to refinance early, you might as well take the upfront savings. You can always sell the property. And, worst case, you can refinance with the lender.
Of course, by signing away your ability to leave (negotiation leverage) you’ll certainly pay a higher rate when you refinance than you could get in the open market. But, you’d pay a penalty to break the mortgage and refinance elsewhere anyway, so the extra you pay on rate usually isn’t as much as a penalty.
The gist of it: Making a serious assessment of your need to refinance early (i.e., increase your borrowing amount or increase your amortization before maturity) is essential when considering a mortgage with a bona fide sale clause. But a bona fide sale clause is far less of a worry than other common restrictions, like big-bank prepayment penalties.