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, the mortgage rate is just one of the many factors to consider.
Policy rate cuts in 2024 and 2025 have lowered borrowing costs, but rates remain above pre-pandemic lows. The housing market across the country is in a cooldown, with demand expected to increase. However, sale prices stay below historical averages and benchmarks in most cases. It is a buyer’s market in many parts of Canada, as closing prices often drop lower than asking.
If you’re currently looking to buy a home, you must also keep in mind the many factors that can affect your mortgage. 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? In reality, there are many reasons why Canadians may need to break their mortgage.
If you sign up for a five-year mortgage term like most Canadians, a lot can happen in five years. Your job situation may change, you could decide to relocate for better opportunities or personal reasons. You may even 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. It’s best to know about these penalties upfront rather than being surprised by them later on.
In 2026, the Financial Services Regulatory Authority of Ontario (FSRA) released its first Enforcement Annual Report. Most of their 2025 investigations were focused on mortgages, and they have started imposing penalties. They have also ramped up their enforcement actions. In 2022, the Mortgage Brokers, Lenders and Administrators Act was amended. The amendments increased the maximum penalty for individuals from $10,000 to $100,000. That’s why it’s important 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. 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 upfront.
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 portable. 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 to ask is, does this mortgage come with a standard or collateral charge? A standard and collateral charge refers to how the mortgage is registered on the 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 hinder 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 know this, so they probably won’t offer you the best rate upon renewal.
Some lenders only offer collateral mortgages. You won’t know unless you ask. Be sure to ask to see proof in writing that it’s a standard mortgage. As with all the factors listed above, make sure it’s in writing BEFORE you sign any offer documents.
Unless you already know you’re going to 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. You’re 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.
Takeaways
As we now know, a lot of factors are in play when choosing a mortgage. While the paperwork can be intimidating, it is worth your time and effort to try to understand it. After all, you are committing a lot of time and money to your home and mortgage! You don’t want to be in a situation where you wish you’d taken the time to read the fine print.
The solution? Read the fine print before you sign the documents. Pay special attention to:
- limited features – some mortgages offering low rates may have strings attached, like requiring collateral or including a bona fide sale clause,
- penalties, and variations between fixed-rate and variable-rate mortgages.
- pre-payment options – how many prepayments per year do the mortgage terms allow, and can you do lump sums or not
- standard or collateral charges, depending on whether you plan to switch mortgages later, or if you need a HELOC
If debt is keeping you from your homeownership dreams, we can help. Call for a free, no obligation consultation. One of our trained credit counsellors will discuss your situation with you and offer an informed recommendation as to what debt solution would be right for you.
