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What You Need to Know About the Bona Fide Sale Clause

Mortgage shoppers who focus only on securing a rock-bottom interest rate may do so at the expense of flexibility that can sometimes save more money over the long run.

For some mortgage products, this may mean inferior mortgage features, but others may come with huge restrictions and clauses that can limit your options in the future. 

Take the bona fide sale clause, for example.  What is this?

If your mortgage contains a bona fide sales clause, it means you cannot pay out or break your mortgage before the end of your term for ANY reason or penalty amount.  Unless you actually sell your house to a unrelated buyer which means you cannot sell the property to a relative - it must be sold at a fair market value.

The clause also applies to those who want to refinance their mortgage, and may prevent you from doing so with another lender before maturity.

The conditions may seem unfair at first glance, but lenders who offer these rock bottom rates with a bona fide sales clause shouldn’t be faulted. This restriction is a necessary trade-off in exchange for obtaining some of the market’s lowest rates. 

The lender is reducing its profit to offer you that competitive rate, so it’s reasonable that they want to make sure the client stays with them through to the end of the term. For a lender, an early discharge costs money and would further erode an already small profit margin. 

Should you avoid mortgages with a bona fide sales clause?  It's not something I would recommend as the cost, in my opinion, outweigh the reward.

But there are cases where the buyer may judge the added restrictions as being worthwhile to secure a rate that’s substantially lower compared to other full-featured products. 

But that will depend largely on one’s circumstances and the potential rate savings.  

If you do consider a mortgage with a bona fide sales clause, you should be 110%  sure there’s next to no chance you would need to break your mortgage - for any reason - before the end of the term.

Choose your mortgage products carefully.  The interest portion of the actual mortgage is paybe 1/4 of a page while the entire mortgage, or even the mortgage commitment can be over 7 pages.

Before rushing in to a mortgage, it’s important to consider not only the interest rate, but also the features that it includes—or doesn’t include. Products with features such as longer rate holds, more generous prepayment privileges and discount penalties—to name just a few— can often prove more valuable than the initial rate savings after closing. 

This is where my services as a licensed mortgage broker can prove invaluable.  I can can help you assess the pros or cons of any mortgage in greater detail and help find the product that works best for you.