Unplug from a Bad Mortgage

By Angie Alvarez, Mortgage Agent

Most consumers get their mortgage from the first lender they speak to, and fewer than half of consumers shop around for mortgage rates. But taking such a passive approach could you cost thousands of dollars over the life of the mortgage loan.

Mortgage loan shopping is just as important as finding the right house. And yet while Canadians spend countless hours negotiating the best deal on a car, new TV, or dishwasher, when it comes time to get the best mortgage, they aren’t always doing the work. Most see a great rate and lock-in without paying attention to all the fine print.

How do you know if you have a bad mortgage? First, check whether you have restrictive prepayment and lump sum privileges that limit you from paying off your mortgage faster.

A ‘good’ mortgage will allow you to prepay 15-20 percent annually without penalty. This payment goes directly towards your principal balance. Some restricted mortgage terms will only let you do this once per year, not offer the option at all, or provide much lower prepayment amounts of only 5-10 percent. The ability to put any extra money you have towards your mortgage during your term can knock years off the remaining life of your loan – so having this flexibility is to your advantage.

Did you exchange the best terms for a better rate? You may have heard the terms ‘no-frills mortgage’ or bona fide sales clause. In exchange for a better rate, a no-frills mortgage has a larger penalty calculation if you want to break your mortgage before it matures. A no-frills mortgage doesn't necessarily mean it’s a bad mortgage, however, it is not suitable for everyone.

A bona fide sales clause means you are stuck with your mortgage until the end of your term unless you sell your home. If you need to refinance elsewhere before the term is up, forget about it.

As the saying goes, “The only thing certain in life is uncertainty.” Almost half of borrowers don’t make it to maturity, mainly due to negotiating a better rate or refinancing to pull additional equity.

Things change, and if you are one of the millions of Canadians who want to refinance or sell before your term is up, you want to ensure you have good terms that allow the flexibility to do so. It’s gratifying to get the lowest mortgage rate, but what if the upfront savings cost you more in the long run?

Beware of penalty calculations Whether it’s to refinance for a lower rate or move to a new property, if you’re looking to get out of your mortgage early, the size of your IRD (interest rate differential) is something you should familiarize yourself with. The size of an IRD penalty depends on your mortgage lender. When you break a fixed-rate mortgage, the penalty clause is the greater of IRD or three months interest.

The major banks have posted IRD rates while many other lenders — often accessed through independent mortgage brokers — do not. Big bank lenders typically use the discount off the posted rate they initially gave you on your mortgage and apply it against the posted rate today for the remaining term to calculate the IRD.

Other lenders do not do this — they compare the discounted rate they gave you to their current discounted rate for the term remaining on your mortgage. The difference can be significant and could cost or save you thousands of dollars.

Take the time to assess your mortgage Connect with a mortgage broker to walk you through your options, especially before you renew. They will help you make a better decision overall — one that saves you the most, without compromising your future goals. They will have a closer look at your current financial situation and explore how you can optimize your mortgage so it’s the best for you.

Contact Angie Alvarez to learn where you stand with your mortgage.

Angie Alvarez

Mortgage Agent/M13001523 Verico Capital Home Lending Independently owned and operated Brokerage License #12347 416.315.6261

angie@capitalhomelending.ca www.mortgageweb.ca/angiealvarez