Personalities of Your Mortgage
Asking the right questions is an important part of the mortgage process. Asking the right questions allows you to understand which mortgage product is right for you! An important aspect of a mortgage is its flexibility and terms, such as how the penalty is calculated if you break your mortgage. Keep in mind that statistically, 70% (7 out of 10 people) of mortgages are broken within the first 3 years. This could be due to a variety of reasons, including life events: matrimonial breakdown, job transfer, downsizing, consolidation of consumer debts, or refinancing to take advantage of lower interest rates. If a mortgage is broken before the contract term (usually 5 years) there will be a penalty that you will need to pay.
A variable-rate mortgage (one that fluctuates with the bank of Canada) depending on the lender, usually incurs a 3-month interest penalty. A fixed-rate mortgage (a set rate that is usually higher than a variable rate mortgage) incurs a penalty of the interest accumulated for the remainder of the term. For example, if you decide to sell your house in year 2 of the 5-year term, you will have to pay 3 years of interest to get out of the mortgage – which may be very costly! Depending on the Lender, you may not be able to break your mortgage at all! The terms surrounding the penalty are crucial to know before you commit to a specific mortgage.
Another important feature is your Prepayment privileges. This means how much extra you can put toward your mortgage principal, both monthly and annually. Make sure to consider the minimum and maximum payment allowed. Depending on the lender, the payment amount might have specific parameters. In other words, the payment amount might be specified such as a minimum payment of $1000.00 monthly, or a maximum payment of 20% annually. If there is no flexibility in the mortgage product you may not be able to make any extra payments.
As a family’s needs grow one may need to sell their existing property to buy another and it may be a good idea to port the existing mortgage to the new property. If portability is an option, you need to make sure you understand the restrictions tied to the portability of the mortgage product you are looking at. Depending on the lender there could be a time restriction such as having to sell your present home AND buy your new home within 30 days.
Another important question is that if you can port your mortgage, can you add further money to purchase your next property? This is known as BLEND AND EXTEND. This takes your present mortgage and its rate and adds new funds to the existing mortgage with the current rates to purchase the new home. It is a little more complicated but certainly can be done. The challenge with BLEND AND EXTEND is that your mortgage renewal dates can land on significantly different timelines and when it comes to selling and ending your mortgage there could be significant penalties to break if it is not set up wisely.
Another personality of a mortgage is if it can be assumed which can make a property more desirable to a buyer. If interest rates have increased since you’ve bought the property it can be very advantageous for the buyer to purchase your property with an assumable mortgage. An assumable mortgage is transferred with no change in its terms. The buyer assumes all responsibility for repayment. But be careful! The original lender needs to agree to this transfer and the buyer may be charged an assumption fee.
Now, to simplify a mortgage term you hear often, let’s talk about Amortization. Amortization means the length of the mortgage if you were to pay it off with the present terms of the current mortgage contract. For instance, if you have a mortgage that is a 5-year term at a specific interest rate, the amortization is the amount of time it would take to pay off the mortgage using the specific payment outlined within the current contract. If you have less than 20% down payment (or equity) your amortization period is legislated to 25 years. There is no amortization flexibility if you have less than 20% down payment (or equity). If you have more than 20% down payment (or equity) your amortization period can be extended to 30 years. The longer you amortize your mortgage, the smaller your payments are. But be careful! You will take that much longer to pay off your mortgage if you amortize for a longer period.
It is VERY important to get clear answers on what the terms of your mortgage are. It makes all the difference in future planning and can impact you in very significant ways. Of course, the rate is important. You don’t want to be paying more than you should be. But if the rate is too low, beware! If it is too good to be true, it probably is! There are likely some hidden costs that you don’t know about. Whether it is a penalty to break, restrictions on porting or assumptions, or even an administrative cost. Always be sure to find out the “in’s and out’s“ of your mortgage.
At GLM Mortgage Group, we know what questions to ask. We have relationships with the lenders that you know about and the lenders you don’t. We would be pleased to educate you on the financial options available to you. We want you to make the best decision possible on the mortgage that you are committing to. Call us anytime for a FREE consultation on the mortgage products available to you.
