Other Factors Besides Just the Rate
When it comes to mortgages, most Canadians are rate-focused. There’s nothing wrong with focusing on the rate; however, just focusing on the rate can be a big mistake. It’s important to consider other factors besides just the mortgage rate.
Other Factors besides the rate
Is it your goal to be mortgage-free sooner? Then you’ll want a mortgage with good prepayment privileges. Prepayments let you make extra mortgage payments above and beyond your regular mortgage payments. You may assume that all mortgages let you make additional payments, but that’s not the case.
If you take a closed mortgage like most Canadians, there are limits on how much extra money you can toss against your mortgage. Prepayments also vary from lender to lender. One lender might let you make lump sum payments on any of your regular mortgage payment dates throughout the year. While another only allows you to make lump-sum payments once a year.
If this matters to you, you’ll want to ask about prepayments up front. Even if you can get a lower mortgage rate, if you are limited by how many extra payments you can make, it can cost you a lot more in the long run.
Penalties are another big one. Again, penalties vary from lender to lender. If you take a variable rate mortgage, the penalty should be straightforward: three months of interest. However, if you take a fixed-rate mortgage like many Canadians, that’s where you can get burned later on.
Fixed-rate mortgages can be costly to break, especially with the big banks. If you like a fixed-rate mortgage’s stability but don’t like the big penalties that come up with it, you could go with a non-bank lender. Non-bank lenders tend to have a lot of fairer penalties than the big banks. That way, you can have your financial cake and eat it too.
For a slightly lower rate, some lenders will limit your ability to move lenders during your mortgage term. When you sign up for your mortgage, you probably don’t plan to break it. However, five years is a long time. A lot can happen in five years. If you choose a so-called limited feature mortgage, you may be stuck with your existing lender for five years.
A limited feature mortgage means one with more restrictions than a typical mortgage. A common limited feature is a bona fide sale clause. With this, the only way you can get out of your existing mortgage is by selling your home.
Another common limited feature is a heftier mortgage penalty. These limited feature mortgages often only come with a rate of 0.05% lower than the full feature mortgage. It’s up to you to decide whether this is worth it. For many, it’s not.
The Bottom Line
Do you have questions about any of these factors? Reach out to our mortgage experts today. We’d be happy to go over these factors in further detail.