With mortgages, the devil can often be in the details
Go back just eight years and choosing a mortgage was a simple process. Borrowers only had to make three choices: the length of the mortgage, interest rate and variable versus fixed.
The most difficult of the three decisions was the variable-versus-fixed conundrum. Statistically, the variable rate was the better choice, however rate hikes of the 1980s still lived in the back of Canadian’s minds.
Today, with rates at all-time lows, fixed-rate mortgages seem to be the obvious choice, making the type of mortgage decision an easy one.
Still, there are now numerous other options becoming more important than mortgage type and many Canadians are finding out about them the hard way – years after they signed the documents.
Everything from payout penalties to how and when a mortgagee can get out of the mortgage now have to be considered.
Here is what you need to look out for:
How is the mortgage registered?
There are two types of mortgages: standard and collateral.
Collateral mortgages have become more popular among lenders such as TD Canada Trust. While they have their benefits – you can increase your mortgage size without having to pay legal fees – they also have their downfalls.
In many cases, banks that use collateral mortgages are attaching credit cards, lines of credits and other loans to the mortgage, often without the knowledge of the client.
This practice can pose a problem when a homeowners go to sell their properties. They can be forced to pay off other loans — not just their mortgage — eating up equity in the home.
Collateral mortgages can also be more expensive to move to a different lender when they come up for renewal.
How is the payout penalty calculated?
There are as many ways to calculate a payout penalty as there are lenders. Some lenders have flat fees of three per cent. Others inflate their penalty by factoring in the discount they gave you when you received the mortgage. Some use more simple and transparent calculations.
The difference can be tens of thousands of dollars. Often the lowest penalties are found at mortgage companies you may not have heard of before – these lenders are often referred to as monolines. Under what circumstances can you pay off the mortgage?
In most cases, as long as you are willing to pay the payout penalty, you can pay off your mortgage at any time. Some lenders, however, put a clause in the mortgage that requires homeowners to sell to rid themselves of their debt. This practice is problematic if you, like many Canadians, believe you should not be forced to hold debt.
With so much to consider, it is worth taking five minutes to consult a knowledgeable mortgage broker. I recommend an Accredited Mortgage Professional (AMP).
Nolan Matthias holds a Bachelor of Arts Degree in Economics, is the co-founder of Mortgage360 and the author of The Mortgaged Millionaire.