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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.
Bona-Fide Roadblock
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.
13 Comments
Thanks for this info. I’ve seen “bonafide sales” mentioned in some of the rates I’ve come across online and wondered what that meant exactly.
My question is why on earth would someone go with a rate with a bona-fide sale clause if the discount is negligible or non-existent? It seems to me you’d want something in return (a lower rate) for the added refinancing restriction.
Hi Sam, The answer is, a rational borrower wouldn’t.
At times, mortgages with bona-fide sale clauses have the lowest rates in the country. In those instances, when the discount is 10+ basis points versus full-featured products, they can make sense for a borrower with a low probability of mortgage changes in five years.
Other times (like now), mortgages with bona fide sales clauses are 5-15 basis points above the low — which makes them largely irrelevant.
Hi, I have Value flex with MCAP since last year. For me it was important 20% a year I could pay earlier, I was planning to finish my mortgage in 5 years. Now I changed my mind and I asked them to refinance for home extension. They won’t approve refinancing since there will be structural changes to the house. Ok, I will just move the mortgage. No, you can’t they told me. I had no idea before. This flex is not flexible at all. I check the contract and email conversation with broker, I couldn’t find anything about it. Now I have to find HELOC with another bank or sue them to go out.
Catalin, What sort of structural changes are you making to the house exactly?
Mel, I will add garage in lateral of my existing house, I will want to make an entrance from new garage to my crawl space trough an existing window, some fundation will be cut, ofcourse not the footing. This step I could skip it. Above garage there will be living space, I will need to cut the wall on my existing second floor to have access. I already have preliminary drawings from a techologue, I’m not doing it myself. MCAP says they can’t approve because they don’t know how the construction will be done. They said: take money from somewhere else and come back when is done for refinancing. I would prefer to transfer the mortgage but I can’t.
Catalin, While I can’t speak to your specific case, I’ve heard of lenders refusing to permit refis for renovations if the renovations are not done by a reputable contractor, don’t have a fixed quote and entail major structural changes. Your best plan is probably to get a HELOC from a lender that charges minimal setup fees. Try Simplii.
Mel, Simplii doesn’t work, I live in Quebec. TD will do it but they will charge prime plus 1.5% since they are in second position.
Didn’t find a contractor yet, need to finish with the plan and permits from the city.
MCAP asked just about modification, they didn’t ask who or how the work will be done. If there are modifications they won’t refinance.
Try Manulife. They did our last HELOC in second position with no setup costs.
You can get out of the deal if you sell though right?
Hi Hilary,
With most lenders yes, but always confirm. We had a reader write in who had a bona fire sales clause. He thought he’d sell to his parents to get out of the mortgage, and ended up rather perturbed when told he couldn’t.
Thank you for your advice.
I can’t go out unless I sell or die. I’m not allowed to sell to relatives.
Good news at least, I have flexible mortgage, just decreased from 2.75% to 2.25 and I’m expecting another .5 decrease.
In couple of months banks should be much easier to have a loan.
Can you please help us identify what a “bona-fide Sales Clause” is? I mean can you provide some sample wording of such a clause?
Hi Ashish,
on my MCAP documents (signed commitment)
It states this under “EARLY PAYOUT PROVISIONS”
I may payout the entire outstanding balance of my mortgage prior to maturity date ;
only if;
a – closing of sale of property on open market
b – renew into another mcap value flex mortgage
c – primary borrower deceases
Check your commitment document for early payout provisions,
you may find something these. (but could be in other places depending on your lender)
If you have not signed – good thing to confirm before you do