With rates beginning to move around a bit, I’ve noticed that some clients are getting better advice than others from various lenders so I asked one of my trusted mortgage brokers to put together some information to start the conversion. The question: what’s the best mortgage available for my clients?
Most people will define a mortgage purely based on the rate they receive, but that’s like judging the “best car” by the one with the lowest monthly payment.
It’s nearly impossible to predict your refinance needs three or four years out. Statistics show that well over half of Canadians with a mortgage renegotiate before their term is up.
So if you try to end your mortgage or move your mortgage prior to the current term (say 5 years) you may face larger than expected mortgage penalties or be restricted by mortgage limitations. Mortgage restrictions can easily outweigh small (e.g., 0.10% to 0.15 %) differences in interest rates.
Did you know the average five-year borrower changes their mortgage after just three-and-a-half years?
That’s why it often pays to trade a slightly lower rate for more flexibility, unless you absolutely know that you won’t change your mortgage during its term. A cheap rate can certainly save hundreds of dollars up front, just be sure you won’t be paying thousands later.
Can you break your mortgage any time you want?
• Most lenders let you pay a penalty and get out of a closed mortgage early. Some no-frills mortgages only let you out if you sell your property. Some don’t let you discharge your mortgage at all, until the term is up.
• You’ll almost always pay a rate premium for an “open” mortgage with no penalties. If you plan to keep the mortgage for more than six months, you’re often better off choosing a lower rate and paying the penalty to get out early (if needed). The more you are borrowing, the more this applies.
If a mortgage penalty applies, how is it calculated?
• Fixed rate penalties are usually three months of interest or the interest rate differential (IRD), whichever is more. This is the difference between what the bank would have made if the mortgage went the full term and how much money they are not getting paid by closing your mortgage rate and the current mortgage market rate. Variable-rate penalties are typically 3-months of interest based on your current rate.
• Penalty calculations based on posted rates (i.e. rates higher the rate you actually pay) can sometimes be several thousand dollars more expensive. For example, instead of a standard 3-month interest penalty based on your current rate, some lenders charge 3-month interest penalties based on posted rates.
• Others charge interest rate differential penalties when 3-month interest charges normally apply. A few even ding you with 12-month interest penalties or penalties equal to 3% of your balance. Avoid such mortgages unless the rate savings is significant.
Can I port (move) my mortgage to a new property to avoid penalties?
Never underestimate your odds of moving. Look for good porting flexibility, especially if you’re young, need job mobility and/or have a growing family. Some lenders let you port, but not increase. That forces you to pay a penalty if you buy a pricier house and need more financing. Remember as well that that credit unions prevent porting across provincial lines, a problem if you move out of province.
Provided by Allan Bowerman, Mortgage Associate-Managing Partner-CERC Relocation Specialist, Ultimate Mortgage Partners Ltd.
If you have been shopping for a mortgage and your lender hasn’t explained about porting your mortgage, terminating your mortgage or other situations when fees may apply, please take the time to review your options and potentially save yourself some money on your mortgage costs.