December 1, 2021
As we’ve said before—over and over—there is so much more to a mortgage than just interest rate, and getting a good mortgage isn’t just about getting the lowest rate. And frankly, there’s so much we as mortgage brokers would love to talk to you about. So what can you talk to a mortgage broker about besides interest rates?
Is part of your plan to pay down your mortgage quickly by making additional payments? Talk to a mortgage broker first! A mortgage pre-payment is an additional payment that you make above your regular mortgage payment. Pre-payments are a fantastic way to reduce your mortgage amortization time and interest costs.
Depending on the type of mortgage you have and with which lender, your pre-payment options are going to be different. If you’re in an open mortgage, you can typically pay more than your regular payment without penalty. This is a great option if you plan to move or sell your home before the term is complete.
If you have a closed mortgage, you’ll likely have a limit on the amount you can pre-pay on your mortgage before triggering a pre-payment penalty. Again, this is where talking to a mortgage broker is going to be invaluable in determining which type of mortgage is right for you.
How you also make your additional payments varies by lender. Most have several options for pre-payment, such as lump-sum payments or weekly/bi-weekly payments. One of the options we try to recommend is accelerated bi-weekly/weekly payments. With this form of payment, you’ll make a few extra mortgage payments a year, reducing your interest charges and amortization by years.
And if you ever want to look at changing your payment frequency, talk to your mortgage broker. You can likely make a change to this schedule after you sign the paperwork.
PORTING YOUR MORTGAGE
Did you know that instead of breaking your mortgage and paying large penalty fees when you need to move or upsize, you might qualify to port your mortgage?
Porting your mortgage is the process of transferring what you owe on your current mortgage over to a new property. If you have an interest rate that you love, you might also be able to bring this into the new mortgage.
Now, why should you talk to a mortgage broker about this? Because the option to port your mortgage isn’t available to everyone and it might not even be the right option for you.
If you’re looking to upgrade your home, the lender might charge a higher rate on the additional funds needed for the upgrade. If you’re downgrading, and the new mortgage is over the amount of what you can pay off with your pre-payment privileges, then you’ll likely pay a prepayment penalty.
It really all comes down to the math which includes figuring out what it would actually cost to break your mortgage and if it’s less or more than the costs of porting.
“Homeowner pays thousands of dollars to leave their home.” These are the headlines you’ve likely seen about mortgage penalties. If there’s any topic you should talk to your mortgage broker about, it’s this. This headline reads like the mortgage lender is ‘scamming’ the homeowner, when in fact, it’s the homeowner that’s deciding to break a legal contract with their lender—a contract that outlines how much the homeowner would pay if they break their contract.
Look, we’re not saying everyone should pay thousands of dollars to break their mortgage, we try really hard to not have that happen! But, it’s where a lot of folks can get stuck when they try to make a move within their mortgage term.
The penalty for breaking a variable rate mortgage is typically calculated on 3 months’ interest on the remaining mortgage balance.
The penalty for breaking a closed mortgage is calculated on either 3 months’ interest on the remaining balance of the mortgage or the interest for the remainder of the term on the remaining balance—this is called the interest-rate differential (IRD). Whichever of the two is higher, is the penalty fee. And usually, it’s the IRD.
Most of the Big Banks will base their penalty calculation on their posted rate which is significantly higher than the actual rate they gave you or the other discount rate they offer for the remaining terms.
And wouldn’t you know, each bank calculates their IRD differently and it’s usually the mortgages advertised with the lowest rates that have the highest penalties. IRD is a very complicated subject and incredibly important when comparing one rate to another, so this is the time to really lean on a mortgage professional.
Here’s a quick test: do you know your current mortgage rate? The answer is likely yes.
Next question: do you know if your mortgage is a standard charge or a collateral charge? *crickets*
When you complete your mortgage, you’re required to sign a charge document. This document, registered in the province or territory where the property is located, outlines the lender’s rights should you not be able to repay the mortgage as agreed.
There are two types of charges a lender can register: standard or collateral.
The biggest difference between the two is when you want to refinance or transfer your mortgage later on. With a standard charge, if you need to borrow more than the initial mortgage amount, you’ll have to pay off your current mortgage and register a new charge. Of course, those lovely fees make an appearance here.
With a collateral charge, you may be able to borrow more funds without having to register a new charge, provided the total amount owing is less than the registered amount of the collateral charge. The downside is if you are ever in need of taking out a 2nd mortgage, or want to register a Home Equity Line behind a collateral charge, this registration type makes it more difficult to do so.
This topic deserves its own post but we hope you’re starting to get the idea of why talking to a broker is important when buying or selling a home!
TALK TO US ABOUT AVAILABLE EQUITY IN YOUR HOME
Finally, talk to your mortgage broker about your lender’s options for a Home Equity Line of Credit (HELOC).
A HELOC is a loan secured against your current property. There are two types: one that is combined with your mortgage, and one that is a stand-alone loan. The one we’re talking about here is the combined HELOC.
A HELOC combined with your mortgage (sometimes called a readvanceable mortgage) can be up to 65% of your home’s purchase price or market value, and 80% when combined with a fixed term portion. The amount of credit available to you will go up as you pay down the principal on your mortgage.
This is a great option to take advantage of your home’s equity and use it towards RESP or RRSP contributions, renovations, vacations, cottage, investment properties, etc. Through our lender network, we have access to more HELOC options than your bank might be able to offer.
Source: Quantus Mortgage
Please feel free to contact me with any questions you may have. It would be a pleasure to assist you or any one of your friends or family members!