Lower Mortgage Rates, Best Option?
Written by Sean Cooper
Monday, April 15th, 2019
Congratulations, you've made the decision to buy a home. For most people, and especially for first time homebuyers, the next step is finding a mortgage. Many people shop for a mortgage based solely on the lowest mortgage rate. This can prove to be a costly mistake, since the lowest mortgage rate doesn't always come with the best mortgage product. It's like shopping for a condo based solely on the list price without considering other factors like location, condo fees, etc. Depending on your financial situation, it may be worth choosing a slightly higher mortgage rate with better features. Here are three other factors to consider when shopping for a mortgage.
1. Prepayment Privileges
If you'd like to be mortgage-free sooner, it's important to pay special attention to prepayment privileges. The majority of Canadians sign up for closed mortgages. With a closed mortgage, there are limitations on how much you can repay during your mortgage term. Unlike an open mortgage, you're not able to repay the outstanding balance during the term of your mortgage without being hit by penalties.
Why do people choose closed mortgages? Because closed mortgages typically come at lower mortgage rates than open mortgages. Closed mortgages do come with some privileges, though. Most closed mortgages let you prepay a percentage of your principal each year and increase your regular payments up to a certain amount. For example, a Tangerine mortgage lets you increase your payment amount by up to 25 percent of your original payment amount each year and make lump sum payments up to 25 percent of your original mortgage balance on any of your payment dates.
2. Mortgage Penalties
Although you're probably not planning to break your mortgage when you sign up, sometimes life happens. You might have to break your mortgage for any number of reasons, including divorce, job loss and job relocation. When signing up for a mortgage, it's important to find out about mortgage penalties.
If you have a variable rate mortgage, the penalty is usually pretty straightforward – three months' interest. However, if you have a fixed rate mortgage, it's usually the greater of three months' interest or the interest rate differential (a formula lenders use to look at the interest lost from breaking your mortgage before the end of its term). Some lenders even have higher mortgage penalties than standard penalties (for example, three months' principal). To avoid any surprises, it's a good idea to find out ahead of time about penalties, in case you need to break your mortgage later on.
A portable mortgage means you can bring your mortgage with you if you decide to move. When you “port" your mortgage, you can often “blend and extend" it. For example, if you're purchasing a more expensive home and you need a bigger mortgage, you can blend or combine the mortgage rate on your current home with your new home. Being able to port your mortgage is your ace up your sleeve if you ever have to move for any reason. You won't have to potentially shell out thousands in mortgage penalties, which means more money in your pocket.