Mortgages aren’t exactly a scintillating topic, but they’re a necessity for most of us buying a home.

Maybe that’s why it’s so surprising that half of Canadians admit to not having a basic understanding of available mortgage options. That’s the central finding from our national survey, released today.

Despite this knowledge gap, 43% of respondents said they felt comfortable negotiating their mortgage over the internet. That’s a number that seems to keep rising every year or two as people gain confidence in their own mortgage decision making and realize the best rate deals are usually online.

There’s no doubt that securing mortgages on the web is the future of mortgage origination. But it’s clear there’s more that needs to be done to ensure borrowers are armed with at least a fundamental understanding of the mortgage products available to them.

A Knowledge Gap that Needs Bridging

Specific to mortgages, a full 90 percent of respondents weren’t aware that interest is compounded semi-annually on a fixed-rate mortgage.

Of those, 28% thought interest is compounded monthly, while 17% thought it’s bi-weekly and another 17% thought it’s annually. Another 28% said they simply had no clue.

Of course, borrowers can be excused for not knowing more technical mortgage details, but the Rates.ca survey found a serious knowledge gap when it came to some mortgage basics as well.

For example, just four in 10 Canadians know that a minimum down payment of 20% is needed to avoid having to pay government default-insurance. That insurance can add up to 4% to 5.85% to your purchase price, an amount that’s baked into your mortgage and accrues interest.

These stats make one wonder how many Canadians don’t know that:

  • A big bank’s first rate offer is generally not its best rate, and is negotiable
  • Many lenders don’t allow enough time to port, practically guaranteeing you’ll pay a penalty
  • Bank mortgage penalties can cost multiples of a ¼-point rate savings
  • Lenders seldom give you their best rate when converting from variable to fixed
  • Some lenders build a penalty into your rate when you ask for more money before your mortgage matures.

All these points can cost you thousands if you indiscriminately choose the wrong mortgage.

Overall Lack of Understanding About Finances

Mortgages aren’t the only area where Canadians earn a mediocre grade.

Knowledge about credit cards was also measured, with similar results.

Nearly seven out of 10 Canadians (68%) aren’t aware that interest on credit cards is calculated daily. Another 30% admitted that they are unlikely or somewhat unlikely to make the minimum monthly payments on their credit cards.

And regarding their overall financial health, 40% of Canadians admitted to not knowing their credit score.

A small bright spot in the survey is that most Canadians know what they don’t know. A full 62% ranked their financial literacy about mortgages at a six or below. So, at least they’re not naïve to having financial blind spots.

There’s no one solution to such knowledge deficits, but we know this:

  • It must start in grade school; 94% believe schools should place greater emphasis on teaching financial literacy.
  • Mortgage comparison websites, like this one, can (and will) do a better job making it easier for consumers to choose the lowest-cost financing.
  • The government can and should expand its investments in consumer education. Canada’s consumer protection agency (FCAC) has done a tremendous job building objective mortgage content, and there’s much more it can do.

There’s reason for optimism, however. With the internet now pervasive in all our lives, we’d give it less than a decade. By then, initiatives like those above may not eradicate debt illiteracy, but they’ll make a big dent in it.

Steve Huebl

Steve Huebl is the operations manager for RateSpy.com and a regular contributor to Rates.ca.

At the age of 15, Steve founded a neighbourhood newsletter that eventually grew to a circulation of hundreds and was supported by over a dozen local advertisers. He later honed his writing and editing talents at The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. He also worked for several years as a chief English writer of the McGill University Health Centre’s marketing office. Born and raised in Toronto, he now calls Montreal home. When he’s not writing about mortgages, Steve can be found appreciating nature — typically along the shores of the St. Lawrence.

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