Your mortgage rate is only one part of the big picture.
To help you avoid a costly surprise when securing or renewing your mortgage, WealthTrack’s, David Pipe breaks down some of the key mortgage terms you should know. For more details on the best mortgage rates in Guelph, contact your mortgage expert. You can get a mortgage with as little as 5% down payment, and the best rates are available to those with more than 35% down or less than 20% with mortgage default insurance.
Variable or Fixed-Rate Mortgages
What’s the difference between a variable and fixed-rate mortgage?
We could quickly fill an entire article with an assessment of both. In summary, fixed-rate mortgages give you a locked-in rate for your whole term (usually five years) in exchange for a promise not to break the mortgage. Variable, on the other hand, allows your mortgage rate to move up and down over time.
Fixed-rate mortgages are more common than variable because homeowners are attracted to the idea of a rate that will never change. However, there is an element of buyer beware here, since many Canadians wind up breaking their fixed-rate mortgage and can be surprised to learn that they face a huge penalty that can be in the tens of thousands of dollars. Lenders have different ways of calculating the penalty, so you should pay very close attention to your mortgage agreement details. Ask your mortgage broker or specialist to explain this part to you. As a general hint, you will often find that the big banks use a complicated method to calculate this, which usually results in a much larger penalty compared to other lenders.
Mortgage Prepayment Penalties
Aside from the cost to break (prepay) the entire mortgage, each mortgage can allow for different prepayment amounts with and without a penalty. This option is especially important for the homebuyer who wants to pay down their mortgage faster. Maybe you receive a bonus, inheritance, or other cash windfall and want to put it on the mortgage. Many lenders allow you to increase payment amounts, make additional payments, or pay off a large amount all at once. The rules for this vary from lender to lender, and paying off more than is allowed can trigger a costly penalty. In the case of variable-rate mortgages, the maximum penalty is limited to three months' interest.
Open vs Closed Mortgages
What’s the difference between an open and closed mortgage?
After all this talk of prepayment penalties, some people might be more interested in an open mortgage. Essentially an open mortgage is one that can be paid off anytime without a prepayment penalty. Nearly all mortgages are closed nowadays because the rate for an open mortgage is so high. It usually doesn't make sense to choose an open mortgage unless you know you will want to sell or break the mortgage shortly.
Other Hidden Fees to Look For
While they are relatively small compared to prepayment penalties, you should also be aware of additional fees that could add up. Each lender has their fee schedule and might charge you for something as simple as a statement or a change your payment date to match up with your paycheque. In some cases, you could be facing a lender fee, which is simply a flat fee you pay when the mortgage starts. It could be 1% of the total mortgage.
In the days of ultra-low mortgage rates, you might want to take your mortgage with you if you move. The reason behind this is that if you need to sell the house and you don't want to pay the prepayment penalty, then you could transfer the mortgage from the old house to the new home. This can come in very handy if you are in a fixed-rate mortgage with an expensive prepayment charge. Look into this as there are rules about how to do this, and you will usually need to be re-qualified before you can port your mortgage.
Finally, try to be familiar with things like mortgage term, amortization, who pays property taxes, and secondary financing limitations. If your situation warrants it, there are speciality mortgage products for the self-employed, new to Canada, or have stated income (tips) or bruised credit. Your home is often your single biggest asset and largest investment, so taking some time to learn the basics can save you thousands in the long run.
If you have been thinking of a move or want to see how much you could save by switching providers, contact David Pipe. Visit WealthTrack.ca for handy mortgage calculators, to apply for a mortgage, and for free, informative articles for any homebuyer.
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