There’s more to a mortgage than just a low rate. Make sure all the features fit your needs.
While some mortgage rates have been increasing in recent weeks, overall, interest rates are the lowest we’ve seen in a generation. Homeowners and first-time buyers getting a mortgage in the months ahead will likely enjoy a rate that will keep their borrowing costs low for the next few years. Indeed, borrowers who have renewed or refinanced a mortgage in the past year now pay interest rates that are nearly one point lower than their previous rate, according to an April report by the Canadian Association of Accredited Mortgage Professionals (CAAMP).
But while securing an attractive interest rate may be the top priority for most borrowers, some low-rate mortgages available today offer limited flexibility. For example, “no frills” mortgages offer favorable rates, but may limit your ability to pay off your mortgage sooner. In addition, “quick close” financing deals offer attractive rate discounts, but many require a closing date within 30 days. This may not provide enough flexibility for sellers or buyers.
When it comes to choosing a mortgage, getting a good rate is just the tip of the iceberg. To ensure smooth sailing, you have to be aware of all the other features that may lie below the surface.
The features of a mortgage should fit a homebuyer’s personal goals, both now and down the road. Borrowers need to understand what they’re signing up for – a mortgage is the largest debt most consumers will ever take on.
Below are five tips prospective mortgage holders may consider when choosing a mortgage.
1. Consider an assumable mortgage
A few years from now when you decide to sell your home, your low-rate mortgage could provide an extra selling point. If you mortgage is assumable, meaning it can be transferred to another borrower, it allows the purchaser to take on your mortgage’s terms and payments as part of the sale. This can be an attractive incentive, particularly in a higher rate environment.
2. Review refinancing penalties
Given the low rates available today, many homeowners are weighing the benefits of refinancing. When choosing a mortgage, keep in mind that penalties are often the equivalent of three month’s mortgage payments, or based on an interest rate differential, which is the difference between your current rate and the new rate. If you consider refinancing, a mortgage broker can help you decide whether the long-term savings outweigh the up-front penalties.
3. Evaluate pre-payment options
Many borrowers are taking advantage of low interest rates by accelerating payments on their mortgages. For example, many lenders allow you to double up payments periodically, or make lump-sum payments of up to 20 per cent of the principal once a year. When negotiating your mortgage, make sure you understand the size and frequency of payments your lender allows.
4. Review skip-a-payment options
Some lenders offer an option to skip a payment without penalty, which may come in handy in today’s economy.
5. Consider portability
Many mortgages have a portibility feature that allows you to transfer your existing mortgage over to a new property, but not all portibility terms are the same. Some lenders allow as long as 120 days to transfer the mortgage, but others only allow for a few days or a week.
Choosing the right mortgage involves considering where you are now, and where you may be three to five years from now. Working with a mortgage professional can help you make sense of the many options available to you.
Source: Gibbard Hoffart Financial Group