But the interest rate is only one of the many elements of a mortgage loan. There are other things to consider which many homebuyers, blinded by the appeal of a low interest rate, ignore or overlook the value of, unfortunately.
Here are some details you should pay attention to when shopping for your mortgage.
In its simplest form, a mortgage loan is a legal contract between two parties, a borrower and a lender. In the event that the borrower breaks the contract (by selling the property before the end of the mortgage term, for example), the lender may impose a penalty to compensate for the interest payments they will lose out on. This is standard for all mortgages from all lenders.
Penalties are calculated in different ways.
In the best case scenario, lenders will impose a penalty equivalent to 3 months worth of interest when breaking your mortgage. For example, if the balance of your mortgage is $300,000, and you have a 3% interest rate on a variable 5-year term, your prepayment penalty will be approximately $2,250. Variable rate mortgages generally always have a maximum of a 3 month interest penalty, which is one of the reasons they are so popular today.
In the worst cases, lenders can impose a much higher penalty… Like the Interest Rate Differential vs 3 month interest penalty, whichever is greater for example.
Some lenders are willing to lower their rates, but in doing so, they will adjust their penalties – and not in your favor!
Friendly advice: be sure to ask how penalties are calculated before committing to a mortgage! nesto’s commission-free Mortgage Advisors can walk you through your options.
When buying a property, most of us don’t like to think about the possibility of breaking our contract a year or two down the line. After all, we’re buying a home for the long term, this is our dream property, heck we love this place! But the reality for many is that the unexpected does indeed happen. Some people might move in with someone else, buy a bigger place following the birth of a child, or even get a job offer in another city that’s too good to turn down!
Breaking a mortgage is more common than you might think. Don’t be that person who ends up paying tens of thousands of dollars in penalties. We can help you understand the penalty particulars of individual mortgage products and find the perfect options for your current and future needs.
Less Prepayment Privileges
Lenders will typically offer two types of mortgages: open mortgages and closed mortgages.
An open mortgage can be prepaid in part or in full during the term of the mortgage without having to pay a prepayment penalty. The interest rates on such a mortgage will often be higher than that of a closed mortgage.
With an open mortgage, your prepayments are unlimited. You can reimburse your mortgage at the end of the first year, if you so desire.
A closed mortgage cannot be prepaid, renegotiated, or refinanced before the end of its term. If you choose to do so, you will incur prepayment penalties.
There are certain prepayment privileges in a closed mortgage. For example, the maximum lump-sum payment you can make during a year could be set at 10% or 20% of the original mortgage amount.
Same goes for increasing your regular payments: most lenders will allow an increase of 10% to 20% of your monthly payments.
Other clauses could impact your options.
The bona fide sales clause is one of them. This clause forbids you to pay off your mortgage (or break your mortgage) during the term unless you sell your mortgaged property.
Another clause commonly found in lower-rate mortgages is the no port option. Here, you can’t take the mortgage with you to a different property if you sell the mortgaged property during your term. Having a portable mortgage allows you to transfer your mortgage balance to a new property, with the same lender, without penalties, thus avoiding many of the costs associated with purchasing a new mortgage.
Because you Never Know…
We like to think we’ve got everything under control. We’ve got a plan, we know where we’re going and when we’ll get there.
But life is not as predictable as we like to think it is. Changes come at you fast. Relationships change. Job offers in a different town or province are made. Lottery numbers come up in your favor.
Because of all this, you must select a mortgage that can change with you.
Don’t lock yourself into a long-term contract, such as a mortgage, without making sure you know all the conditions attached to it. This will help you avoid unpleasant surprises somewhere down the line.
Considering all this, the best rate can still be a good fit for some people. Seasoned investors, and seniors who have been living in the same place for a long time, for example, can focus on getting the best rate without worry.
Our nesto Mortgage Advisors will give you access to the best rates, while ensuring that the mortgage conditions are the right fit for you.