Why the fine print of your mortgage approval matters
When applying for a mortgage, the rate and payment amount initially seem to be the most important, however, there are other items that should be understood before you sign on the dotted line. Read on for the top four mortgage features that could be particularly impactful to your future financial goals.
- Online Access
Most large lenders offer online access that allows you to see your current balance owing, as well as what portion of each payment goes to interest and what amount goes to paying down your mortgage principal. You can also see your maturity date and property tax account details. This is an important time-saving feature for anyone who prefers using a computer versus calling into a service centre.
- Early Payout Options
Historically, the average homeowner will ‘amend’ their mortgage term every 3 years, though many people choose to take a 5 year term. Even though you aren’t intentionally thinking about breaking your term early, it could happen. If you do break the term early for any reason, there is most often a payout penalty involved unless you have an open term or a home equity line of credit (HELOC). It’s important to note that many lenders will offer other early payout options detailed below:
Blend, extend and increase: If you want to refinance for more money, or “port” your mortgage to a new property, this option allows you to blend your existing rate with the current rate offerings so you can avoid or reduce a payout penalty. Your decision will depend on the rate environment at the time. When considering this option, you will be required to take possession of the new property within 30-90 days of paying out on the old one, depending on the lender. It is also important to note that you will have to pay the penalty at the time your old home sells which will then be fully or partially credited back to you when you take possession of the new property. Do be aware you are only “porting” the terms of the mortgage, you are required to re-qualify as you did originally and must also go through a lawyer as a mortgage is only good for the property it is registered against.
Assumption: If you are moving and have a great interest rate compared to what the current rates are at, your new buyer may want to assume your existing mortgage if they qualify. Most lenders will also allow them to blend, extend and increase. This is another way to avoid paying the payout penalty if you are moving mid-term.
- Title Registration
This clause is important if you ever want to change mortgage lenders. Some lenders register their mortgages on title under a collateral mortgage charge, while other mortgage lenders will register under a standard charge. There are a number of important differences between these two types of registrations which you should be aware of before you commit to any mortgage lender. How your mortgage is registered is dependent on type of borrowing you are interested in, lender you are working with, and what your future financial goals are. I encourage you to have a detailed discussion with your mortgage professional about how your mortgage is going to be registered.
- Payment Types
If reducing your mortgage principal quickly is one of your financial goals, payment options are going to be important. Accelerated bi-weekly or accelerated weekly payment frequencies are equivalent to making one extra monthly payment per year, a 25 year amortization can be reduced by approximately 7 years! Another way to pay down the mortgage faster is to take advantage of any pre-payment privileges offered by your lender as every little bit helps over the long term. You can usually prepay in small increments throughout the year up to 10-20% of the original mortgage balance or last renewed balance owing depending on the lender. You can also increase your principal and interest payments by up to 10%-20% each year, again, depending on your lender. In addition to the first two options, some lenders will also allow you to double up each and every payment. Make sure your mortgage professional is aware of your financial goals when securing mortgage financing options for you.