As a first-time homebuyer, it’s easy to obsess over finding the lowest mortgage rate. If you’re like most people, your mortgage is most likely the largest debt in your lifetime, so it makes sense to look for a low mortgage rate.
While a low mortgage rate is important, you should also understand the lowest mortgage rate isn’t necessarily the best mortgage for you. There are several other important factors you should consider when shopping for the ideal mortgage.
Prepayment Privileges
Just because you have a 25-year mortgage, doesn’t mean you can’t pay it off sooner. Open and closed are the two main types of mortgage. With an open mortgage you can pay off your mortgage in full at any time, although you’ll pay a higher mortgage rate. With a closed mortgage, you’re limited by how much you can prepay.
Those with a closed mortgage can still pay down their mortgage faster. Most lenders offer generous prepayment privileges. Many lenders let you make lump sum payments, increase your mortgage payment, or double up your payment.
If you don’t plan to pay down your mortgage sooner, you might be able to find a no-frills mortgage with limited prepayments, but if you’re counting down the days until your mortgage burning party, you’ll want to consider how much you can prepay.
Mortgage Penalty
The most popular mortgage product in Canada is the five-year fixed-rate mortgage, yet many first-time homebuyers will want to escape the shackles of their mortgage sooner than five years. Breaking your mortgage can prove costly, especially if you have a fixed-rate mortgage.
If you have a variable rate mortgage, the mortgage penalty is pretty straightforward: three months’ interest. However, if you have a fixed-rate mortgage it’s a bit more complicated and more often than not costly. Your mortgage penalty will be the greater of three months’ interest or the Interest Rate Differential. Although the IRD is calculated by lenders the same across the board, the comparison rate used to calculate your penalty varies between lenders.
The big banks are notorious for hitting homeowners with massive penalties. Even if you receive a sizable discount on the posted rate, your bank will base the mortgage penalty on the inflated posted rate. That means you could end up shelling out thousands of dollars to get out of your mortgage early.
Portability
Although you may buy a home with the intention of living there for the years to come, sometimes life happens and plans change. A change in career, a growing family, or divorce is all reasons why you may want to break your mortgage.
If your mortgage is portable, you can “port” it to your new property without paying a costly mortgage penalty. If your new home is more expensive you can “blend and extend” your mortgage. This is a good idea when the mortgage rate you’re paying is lower than what’s currently available on the market.
