I like to call it “future-proofing” your mortgage; and it’s something that most brokers, and definitely banks, don’t advise you of:
Hunting for the best interest rate on your mortgage? Congratulations – by shopping around you’re already ahead of the home-buyer pack, and likely to score a great deal.
It’s proven that exploring your mortgage options equal better savings in the long run – and those who are unquestionably loyal to their financial institutions (called positive bank bias), end up paying more than those who look for a better rate. A Bank of Canada study found that those who don’t compare their mortgage rate pay a premium of between $759 and $1,617 on their home financing.
It’s a fact we know resonates with our own customers; in a recent poll we conducted on mortgage rate motivation, 50.8 per cent identified the lowest rate as the best mortgage feature available.
While shaving even a few basis points off your rate can save thousands over the long run (check out this eye-opening savings breakdown!), it shouldn’t be the only motivational factor for homebuyers. The best mortgage rate is one that fits your specific buying and homeownership needs.
Here are four essential questions to ask when comparing the market:
1: Can I Pay My Mortgage Off Sooner?
The tricky thing about paying the interest on your mortgage: because you’re charged interest on an annual basis, the longer your mortgage lasts, the more you’ll shell out. It’s a great idea to ramp up the frequency of your payments or make occasional lump sum payments in order to shorten your amortization. In fact, doing a combo of both has thepotential to save you over $15,000 over your mortgage!
However, not every mortgage product allows the flexibility to make extra payments, and some may even penalize homeowners for paying off their mortgage early. Look for details regarding prepayment privileges when comparing your mortgage rate, which specify how much more you can pay on a monthly and annual basis on your mortgage.
2: Can I Break Or Move My Mortgage?
Let’s say you’ve found a great starter home and have settled into a mortgage with a fixed five-year term… but three years in, you realize your family is in for a growth spurt and that quaint one bedroom/one bath just won’t cut it. An ideal solution would be to sell and simply bring your existing mortgage along to your new home, especially if the rate you locked in at is lower than current market offerings. This feature is called a portable mortgage – but not all lenders offer this option.
Without the ability to port your mortgage, you’ll be forced to break your agreement instead – and incur the full associated penalties. The penalty for breaking your mortgage is three month’s worth of interest for variable rate holders, and the Interest Rate Differential for fixed rate owners (the difference between the original interest rate, and the current interest charged by the lender for the remainder of the term).
Pro Tip: Not sure how much you’d pay? Crunch your mortgage costs with our Mortgage Penalty Calculator>
3. Does It Offer a Great Rate Hold?
Getting preapproved for a mortgage is a smart first step for buyers; doing so establishes your range of affordability, and provides peace of mind during the home buying process. Apre-approved mortgage rate will be available to the buyer for a limited amount of time – some products offer up to 120 days. By comparison, some rate holds may last as little as 30 days, putting buyers on a very constrained timeline. Savvy buyers should confirm that a rate hold will work with their buying plan, and will indeed still be available by the time they’re ready to close on their home purchase.
4: Are There Restrictions For First Time Buyers?
Buying your first home? Chances are you’ll fall into the high-ratio category, meaning you plan to pay less than 20 per cent up front on your home purchase. In fact, in today’s steep housing market, many newbie buyers struggle to swing more than the five per cent minimum.
This paints them as higher risk in the eyes of the bank, as they’re likelier to default on their mortgage payments. To counter this, high-ratio buyers are required to take out default insurance (either through the CMHC or a private insurer like Genworth) – and some lenders may deign to offer this group access to their best rates. If combing the market based on low rates alone, ensure you qualify based on your financial situation.
By: Penelope Graham, Editor, RateSupermarket.ca