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What to Consider When Choosing a Mortgage

By Debt.ca on July 13, 2020 No Comments
Couple Choosing a Mortgage

If a new home is in your immediate future you must know what to consider when choosing a mortgage. When shopping for a mortgage, your first instinct is probably to search for the lowest mortgage rate. While the mortgage rate certainly matters, not all mortgages are created equal. As you’ll soon find out, mortgage rate is just one of the many factors to consider. I would argue that there are other more important factors to consider.

Without further ado, let’s look at what to consider when choosing a mortgage.

Penalties

When you’re searching for a mortgage, probably the last thing on your mind is breaking it. For many of us mortgage penalties are an afterthought. I don’t plan to break my mortgage, so why should I care about penalties? The thing is life is constantly changing.

If you sign up for a five year mortgage term like most Canadians, a lot can happen in five years. Your employer could lay you off; you could decide to relocate for a better job opportunity or you could choose to break your mortgage to take advantage of lower mortgage rates.

The bottom line is that the reasons for breaking your mortgage are almost endless. Wouldn’t you rather know about these penalties up front rather than being surprised by them later on?

CBC News recently wrote a news story about a lady who was charged a $30,000 mortgage penalty when she was forced to sell her home during the pandemic.

Few could have seen the pandemic coming. I’m sure this poor lady didn’t think there was any chance she’d be breaking her mortgage, but then the pandemic happened and it changed everything.

That’s why you want to ask your mortgage broker and lender how the mortgage penalties work with any mortgage product you’re considering signing up for.

Usually fixed rate mortgages with the big banks come with the heftiest of mortgage penalties. If you think there’s a decent chance you could have to break your mortgage over the next five years, you might consider going with a lender that offers lower fixed rate mortgage penalties (or going with a variable rate mortgage, which typically only has a mortgage penalty of three months’ interest).

Prepayments

Is it your goal to be mortgage free as quickly as possible? If you’d like to “burn your mortgage,” then choosing a lender with flexible prepayment privileges is a must.

When searching for a mortgage, many first-time homebuyers assume that mortgage prepayments are the same across the board. While I wish I could say that’s the case, that’s not actually true.

While it is true that the vast majority of closed mortgages offer prepayment privileges of some sort, how much you can actually prepay varies greatly.

For example, some lenders offer 10/10 prepayment privileges, some offer 15/15 or 20/20. (The first number is the amount you can prepay on an annual basis, while the second number is by how much you can increase your regular mortgage payment up to. For example, if you had 20/20 prepayment privileges, you could make lump sum payments of up to 20 percent a year and increase your regular payment by up to 20 percent a year.) Some lenders let you double up your payments as well, while others don’t.

While 15/15 or 20/20 prepayments are usually plenty for most Canadians, something to watch for is how often you can make those prepayments. Some lenders are super restrictive and only let you make lump sum payments once a year on your mortgage anniversary date. Other lenders let you make lump sum payments anytime throughout the year.

If you plan to take full advantage of this feature, it’s better to choose a lender that lets you make lump sum payments anytime throughout the year, but again, not all lenders do. That’s why it’s so important to ask about this up front.

Portability

If you think there’s a chance you could move during your mortgage term, you’ll want to look into choosing a mortgage product with a flexible portability clause.

Mortgage portability refers to the ability to “port” or move your mortgage from one property to another. Most lenders allow you to port your mortgage, but the degree of portability can vary a lot from one lender to the next.

One thing you want to look into is how many days you’re given to port your mortgage. Some lenders offer you 90 days, some offer you only 30 days. If you aren’t able to port your mortgage over this timeframe, you’ll be forced to pay a mortgage penalty.

If you think there’s a good chance you could have to port your mortgage, you’ll probably want to go with a mortgage that offers as many days as possible to port.

Not all mortgages are portability. Variable rate mortgages may not be portable. If you’re going with a variable rate mortgage, double check if you can indeed port your mortgage.

You probably won’t be buying a home for the exact same amount, so make sure you can “blend and extend.” Blend and extend refers to borrowing additional mortgage money because you’re buying a more expensive home. Again, not all mortgage lenders will allow you to do this.

Also, ask if your mortgage can be reduced when porting your mortgage if you’re buying a less expensive home.

Standard vs. Collateral Charge

A not so obvious question is ask is, does this mortgage come with a standard or collateral charge? What’s a standard and collateral charge, you ask? It refers to how the mortgage is registered on title.

A collateral charge is great if you plan to take out a Home Equity Line of Credit (HELOC). However, if you’re not planning on doing that, a collateral charge can hammer your ability to shop around for a mortgage upon renewal. You may be required to pay $800 or $900 out of pocket to move to another lender. Your existing lenders knows this, so they probably won’t offer you the best rate upon renewal.

Some lenders (TD Bank and Tangerine) only offer collateral mortgages. You won’t know unless you ask. And be sure to ask to see proof in writing that it’s a standard mortgage.

Unless you need a HELOC, it almost always makes sense to choose a mortgage with a standard charge. You may get a slightly better rate with a lender with a collateral charge, but is it worth it if you’re going to be forced to pay a lot of fees later on to switch lenders? It’s probably not.

Limited Feature

The mortgages with the lowest rates often come with plenty of strings attached. Besides many of them coming with collateral charges, some come with a “bona fide sale clause.” A bona fide sale clause sure is a mouthful to say, but you’ll want to make sure you understand this term when signing up for mortgages.

A bona fide sale clause refers to the fact that you can only break the mortgage with the lender if you sell your home. If you want to break your mortgage for any other reason, you usually can’t. For example, if you want to break your mortgage to switch to another lender for a better rate in the middle of your mortgage term or you want to refinance, I’m sorry to say, but in most cases you can’t do that. Your stuck in your existing mortgage until the end of the term unless you sell.

For some, the lower rates of a limited feature mortgage can be attractive, but for most people I find it’s probably worth signing up for a mortgage with a slightly higher rate without this restriction in place.

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