When it comes to mortgages, it’s easy to focus on the rates and your current situation, but the reality is that things change as life happens! When it does, rates won’t be the only thing that matters.
A mortgage is a contract between you (the homeowner) and the mortgage lender. With that, there are often penalties involved if the contract is ever broken. This is something that every homeowner agrees to when you sign mortgage paperwork, but it can be easy to forget.
Here is our insider advice on mortgage penalties:
A super low rate can just be a “bait-and-switch” tactic by the mortgage lender
It’s easy to do a quick search online and see 100’s of mortgage lenders and what their current rates are. But how do you make sense of what’s legitimate?
That’s where connecting to a reputable broker is important. A recommendation from a family member or even someone locally who has a good reputation is often the best place to start. A lot of people have come to us for help after they started working with another mortgage company only to find out later that the rate advertised online wasn’t the mortgage they were eligible for and now they have problems with their mortgage refinance, renewal or even their purchase!
Starting with an online search is a great way to familiarize yourself with what’s available, but don’t trust your mortgage with a lender working out of a call centre.
Choose a mortgage term that fits your lifestyle and goals for the property
Approximately 6 out of 10 mortgages in Canada are broken within 3 years. Most people choose a five-year term. Why? We have no idea! It’s usually best to pick the length that matches your plans. There are some circumstances where choosing a longer term mortgage is helpful, for instance, right now we’re recommending longer terms (five plus years) as rates have been so low and will likely be going up gradually. The longer term in this situation will allow you to get the greatest benefit from today’s low rates.
Beware of 10-year terms though. Why? They are super difficult to renegotiate in the first five years and you may find yourself stuck with a mortgage or not being able to move or sell your home because of the penalty.
When does it make sense to pay the mortgage penalty?
Your mortgage broker can do a calculation for you to determine if the penalty that you’d pay on the mortgage to make a change will offset the difference in the lower rate you can get on your mortgage. They’ll also take into consideration other debts you may have like credit cards and lines of credit. If paying the penalty doesn’t make sense, then the other option would be to take a blended rate mortgage (which combines a lower rate and your higher rate, kind of like an average).
Remember, mortgages are complex financial instruments, so always read and understand the fine print on the contract or work with a trusted professional who can guide you through the nuances of finding a mortgage.
We’re available to discuss your specific situation! You can book a 15 minute online appointment with us to help you navigate the best choices for you! Visit /contact-us/