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Mortgage Features: More than the Best Mortgage Rate

Mortgage Features: More than the Best Mortgage Rate

By Matthew Chan, CA MBA AMP

Getting the best mortgage rate doesn't necessarily mean you're getting the best mortgage. A no-frills mortgage with a rock-bottom mortgage rate may have the lowest interest rate, but it could cost you in the end.

And lenders like to upsell you to a mortgage with more features, but they've always been very cagey about telling you what those mortgage features mean in terms of dollars and cents. As of November 5, 2012, federally regulated financial institutions in Canada are going to have to be absolutely clear in explaining what it will cost to get a mortgage you can pay off faster.

Meanwhile, let's take a look at mortgage features that might -- or might not -- match your needs.

 

No-Frills Mortgage
 

What It Is A basic, fixed-rate mortgage with:
  • limited prepayment of the original principal (typically 10- per cent or less)
  • no double-up payment feature
  • limited or no ability to increase your mortgage payment
  • penalties (very high in many cases) for refinancing or paying out the mortgage
  • in some cases, no ability to refinance unless your home is sold
  • limited ability to port your mortgage (take it with you)  if you move
You Want It If...
  • Interest rates are low
  • You see no need to change the mortgage term and payments
  • You don't expect to be able to make extra lump-sum payments of over each year (usually 10 per cent or less per year)
  • You want your payments to stay the same through the life of the mortgage
You Don't If...
  • You want to pay out the mortgage or refinance it before the term is up  (over 70% of borrowers do)
  • You'll have enough money to make large lump-sum payments occasionally
  • You expect to be able to increase your payment each year

 

 

Variable Rate Mortgage

What It Is
  • Your mortgage rate is tied to the current prime interest rate and goes up or down with it
  • Payments could either move up or down with the prime rate, or stay the same but cover more or less of your interest as the prime rate fluctuates
  • You can lock in any time, so if interest rates are climbing you can switch to a fixed mortgage rate
You Want It If...
  • Interest rates are trending down (the situation since 1990)
  • You have the potential of paying a lower average rate than a fixed-rate mortgage offers -- there used to be a significant difference between variable and fixed rates, but with the recent historically low interest rates, lenders have decreased the difference to make fixed rates more attractive
  • You're willing to pay attention to the prime rate
  • You like the flexibility to lock in to a fixed rate mortgage later
You Don't If...
  • Interest rates are going up (they're steady right now, but there's only one place to go from here)
  • You like security and predictability

 

 

Prepayment Privileges
 

What It Is Your mortgage includes the right to make extra payments up to a certain percentage of the whole without penalty:
  • In one or more lump sums per year
  • In double-ups, or extra amounts whenever you want to make them
  • In increased payments arranged annually
You Want It If...
  • You want to pay your mortgage down faster
  • You expect to have extra money in your budget to add to your payments or increase them every year
  • You're expecting lump sums you can apply to your mortgage, e.g., bonuses from work or an inheritance
You Don't If...
  • You don't forsee any extra money in your budget

 

 

Payment Deferral
 

What It Is Your mortgage lets you skip one payment or one month's payments per year. Some banks require you to make a double payment at some point to make up for a missed payment, so if this feature is offered with your mortgage, check the terms.
You Want It If...
  • You want to have the option of deferring a payment in case of an emergency
You Don't If...
  • You'd be tempted to use the money as disposable income rather than an investment in your future

 

 

Collateral Mortgage 

What It Is This mortgage can be split into multiple components, e.g., part fixed rate, part variable rate, part secured line of credit. Many banks automatically register their mortgages as collateral mortgage, including TD and ING.
You Want It If...
  • You want to separate different portions of your mortgage for tax purposes -- if you took out a loan for investment/business purposes, then it's easier to track the interest expense for tax purposes
  • You're undecided and want to diversify the mortgage so you have some on both variable rate and fixed rate
  • You plan to use some of the equity in your home later, e.g., for investment or renovations
You Don't If...
  • You don't want to be tied to one bank because you have different loans with different renewal dates
  • You don't want to incur legal fees if you switch to a different lender
  • You want to have leverage to negotiate or switch (banks love collateral mortgages because they can tie in more banking services with them, like secure credit cards, lines of credit, RRSP loans, etc.
 

Every lender creates different packages and uses different names for these mortgage features. An independent mortgage broker will thoroughly analyze your needs and help you find the best mortgage, not just the best mortgage rate.

 

Matthew Chan has been a licensed mortgage broker since 2004 and served on the Board of Directors for MBABC during 2006 and 2007. Before becoming a mortgage professional, Matt earned a Chartered Accountant designation with a Big Four accounting firm and earned an MBA from the Rotman School of Management at the University of Toronto.


Source: REW.ca