Once again we see a rate war – banks and mortgage brokers drop their advertised rates. If you were planning on renewing your mortgage or thinking of buying this would be great news for you!
Rates aside, 6 important questions you should ask are below. After all what good is saving a few bucks and getting hit with a large penalty or being stuck with limited options?
1. Blend and Extend
Since the introduction of using the benchmark qualification rate, there is a higher importance on the ability of lenders to blend and extend an existing mortgage (whether it be on a refinance or a port and increase). Lets say you are moving and purchasing a more expensive property 3 years into your mortgage If you were with an institution that does not allow any change to the maturity date, you would be stuck with whatever term is left on your mortgage. With an increase in rates this could prove to be an inconvenience for you when your mortgage is up.
The bigger downfall is paying out a big penalty, as you may not qualify for the remaining term. Lenders use the benchmark qualification rate for fixed terms of less than 5 years in length. If you get a mortgage today and in 3 years, you decide to move and buy up, you would have only 2 years remaining on your mortgage. If you were with a lender that doesn’t allow a blend and extend you would need to qualify using the posted rate since the remaining time is less than 5 years. If you do not qualify for it, you would have to break your mortgage and re-qualify on a five-year rate. Breaking your mortgage may be difficult and costly if you went with a lender that uses posted rate discounts in their IRD Penalty Calculations. On the bright side, if you have a mortgage with a lender that allows a blend and extend you simply blend your mortgage rate with current 5 years mortgage rates and make the change penalty free. The difference is of course not only cost but also options.
2.Early Payout Penalty Calculation
The big banks or chartered banks are known for their extremely large pre payment penalties or IRDs. Some other lenders will hook you in with a great rate but charge the grater of 3% of your mortgage balance or IRD. This would mean a minimum of $15K penalty on a $500K mortgage. If there is a possibility that you will not keep the mortgage for the entire term, caution against going with these lenders. A 0.05- 0.10% difference in your interest rate would not be worth the hassle. Remember things happen, couples separate, strata’s get special levies and people sell their place. Think of it as insurance to your sanity.
How is the mortgage being registered? (Standard or collateral – running account) A collateral mortgage or a running account makes it difficult for you to switch your mortgage even when your term is up for renewal. The only way out may be through a refinance if there is enough equity. Again you are tied in and the lender has the upper hand.
4. Prepayment Privileges
How much does your lender allow you to contribute to your mortgage so that you can be mortgage free sooner? Lenders usually allow anywhere from 10-20% annual pre payments. The questions you need to ask are: Can the lump sum payments be made anytime in the year? Is there a cap to the number of payments or are they unlimited? How easy it is? Is there a cost? What other options do you provide? (Double up payments, increase in payment, etc. ) Keep in mind if that if the lender only allows you to make lump sump payments on the anniversary, it makes it a lot more challenging for you. If you miss it, then you have to wait until the next year.
5. Porting Features
How much time do you have to port your mortgage. This ranges from 1 day to 120 days. A same day port can be extremely challenging if you find your dream home, which has a closing date later than the completion of your sale.
6. Online Access
We tend to do everything online so it makes sense to have our mortgage information available to us whenever we want to access it. Online access allows you to see your balance, make additional lump sum payments, or make a payment increase. Especially if you are signing on with a lender without a branch or service centre, online access is pertinent as you can access your info anytime that is convenient to you.