Go back in history just eight years and choosing a mortgage was a simple process. There were only three variables a borrower really had to consider; the length of the mortgage, the interest rate, and whether it was variable or fixed.
The most difficult of the three decisions was the variable versus fixed conundrum. Statistically, the variable rate was the better choice, however the rate hikes of the 80’s still lived in the back of Canadian 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. Unfortunately, there are now numerous other options that are becoming more important than mortgage type, and many Canadians are finding out about them the hard way – years after they signed their mortgage documents.
Everything from payout penalties to how and when a mortgagee can get out of the mortgage now have to be considered, and banks and brokers aren’t exactly forthcoming when it comes to the features of a mortgage that can negatively affect the client. Here is what you need to look out for.
How is the mortgage registered?
There are two types of mortgages – a standard mortgage and a collateral mortgage. Collateral mortgages have become more popular among lenders like 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 one goes to sell their property, as they can be forced to pay off other loans, not just their mortgage, eating up any equity in the home that they thought they had. Collateral mortgages can also be more expensive to move to a different lender when your mortgage comes 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 3%, others inflate their penalty by factoring in the discount they gave you when you received the mortgage, and others use more simple and transparent calculations. The difference can be tens of thousands of dollars, and don’t think your bank will have the most favorable terms. Often the lowest penalties are found at mortgage companies that 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 you to sell in order to rid yourself of your debt. This practice is problematic if you, like most Canadians, believe that you should not be forced to hold debt.
With so much to consider, it is worth taking 5 minutes to consult a knowledgeable mortgage broker. I recommend an Accredited Mortgage Professional (AMP).
