What is a Bona Fide Sale Clause?
A Bona Fide Sale Clause is a contractual restriction in mortgage agreements that essentially binds the borrower to the lender for the entire duration of the term, unless the property is sold in a non-arm’s length transaction. This clause is typically found in low-frills, flex or limited mortgage products that offer attractively low interest rates.
Pragmatic Answer: A Bona Fide Sale Clause in a mortgage binds the borrower to the lender for the term, only allowing exit of the mortgage if genuinely sold. Accepting this clause can be risky, and expensive.
Bona Fide Sale Clause in Mortgages Decoded
When exploring mortgage options, borrowers often encounter various clauses and terms, one of which is the Bona Fide Sale Clause. This clause, while offering lower interest rates, comes with restrictions that may have long-term financial implications. In this Frequently Asked Question, we delve into what it is, the reasons to be cautious about it, its potential dangers, and why lenders might include it in certain mortgage product offerings.
Why Consider Avoiding Bona Fide Sale Clause Mortgages?
Despite the lure of lower rates, there are compelling reasons to be wary of mortgages with a Bona Fide Sale Clause:
- Restrictive Early Discharge Terms: Exiting these mortgages before term-end, even through a property sale, can incur significantly higher IRD penalties than standard mortgage products.
- Legal Risks: Attempting to refinance, switch lenders, or secure lower rates can lead to legal complications, including breach of contract lawsuits.
- Financial Implications: The long-term costs and lack of flexibility could outweigh the initial savings from the lower interest rate.
Potential Dangers of the Bona Fide Sales Clause
The Bona Fide Sale Clause can pose several dangers to borrowers, especially those who might need financial flexibility.
Reduced Flexibility
Limits options for refinancing or renegotiating the mortgage. Life events can happen and when we least expect it. For example, what if you need access to equity in your current home for an emergency? A Bona Fide Sale Clause could force you to sell your home to obtain what you need.
Financial Burden
High penalties for early mortgage termination can be financially burdensome.
- Legal Complications: Risk of legal action by the lender for contract breach if attempting to refinance or switch lenders.
Why would some Lenders include a Bona Fide Sale Clause?
Lenders could include a Bona Fide Sales Clause in order to offset the lower rates provided within that specific product.
- Ensure Customer Retention: To keep customers for the full term, which is financially beneficial for the lender.
- Offset Low Rates: To compensate for the lower profit margins associated with offering lower interest rates.
- Minimize Early Discharge Costs: To reduce financial losses from early mortgage terminations.
Frequently Asked Questions
Can I negotiate the removal of a Bona Fide Sale Clause?
Certain low-frills or low-featured mortgage products enforce the Bona Fide Sale Clause, which cannot be removed. However, most lenders offer higher quality mortgage products that do not enforce this Clause. Consulting a Mortgage Broker will ensure you are informed of all your options before making a final decision.
What if I need to move before the mortgage term ends?
If you need to move before the term ends and wish to keep your home, you might face high penalties or legal challenges, depending on the terms of your specific Bona Fide Sale Clause.
Is a mortgage with a Bona Fide Sale Clause ever a good option?
For some borrowers, particularly those who are certain they won’t need to break the mortgage early, the lower interest rates might justify accepting this clause. It’s essential to be realistic about future events that could impact your financial stability and future plans before making this big decision.
What should I do if I’m considering a mortgage with this clause?
Consult with a licensed mortgage broker to understand the full implications of the clause. They can help you weigh the pros and cons based on your personal and financial circumstances.
Are mortgages available that do not force this clause?
Yes, there are many mortgage products without this clause. Comparing different options with the help of a mortgage broker can help you find a mortgage that balances interest rates and flexibility.
For more information and personalized advice on mortgage terms and products, consider consulting a professional mortgage broker.
