Most Canadians who become homeowners typically need to take out a mortgage to help finance such a purchase. And as you may already be aware of, a lower rate on your mortgage is ideally what you want (or is it? learn more here). After all, the lower the interest rate, the more affordable the mortgage will be overall.
But there are other terms of the mortgage that should also be compared against other mortgage products. In addition to comparing different mortgage products, it’s also useful to negotiate with lenders to ensure the mortgage product you’re signing for is as suitable as possible to your financial situation.
So, how exactly do you go about negotiating the best mortgage contract for this year? The best way to do that is to understand the terms of your mortgage and understand what you need and want from your mortgage contract.
What is a Mortgage Contract?
A mortgage contract is a list of terms and conditions related to the eventual purchase of the home in question. However, being that the situation revolves around hundreds of thousands of dollars, it’s extremely important to study your own contract thoroughly and understand every feature involved. The consequences of breaking a mortgage contract could certainly be worse than a slap on the wrist.
Strictly speaking, there are two styles of mortgages. However, it should be noted that different lenders may only have certain types of mortgage products available to offer. Also, some borrowers may not necessarily qualify for all types of mortgages.
Conventional mortgages. These involve a minimum down payment amount of 20% of the purchase price of the home.
High-ratio conventional mortgages. These allow for a minimum down payment amount of 5% of the home’s value, though they will require default mortgage insurance, in order for the lender to hedge against the risk of the borrower defaulting.
The mortgage term refers to the time frame within which the mortgage contract remains in effect, including the interest rate, fees, and policies.
This means you’ll be able to renegotiate your contract or switch lenders within a shorter amount of time, without having to pay any extra fees. The downside here is that, if interest rates go up, you may have to renegotiate at a higher interest rate.
This means that you may be able to lock-in a favourable interest rate for a longer period of time, saving you money and helping you budget according to your strengthened knowledge of your typical housing costs. The downside is that you may be charged a prepayment penalty if you make any changes to your contract before your term is up.
Here, homeowners are able to extend their short-term to a longer one. After they’ve converted or extended their term, they’ll qualify at the interest rate that their lender is offering for a longer-term mortgage, which can end up being more affordable.
Can you pay off your mortgage early? Read this to find out.
The amortization period is the time you, as the homeowner, have to pay off the full mortgage amount. The longer your amortization is, the lower your regular mortgage payments will be. While these smaller payments can be financially beneficial to some, keep in mind that the longer your amortization is, the more you’ll end up paying in interest over time.
In Canada, homeowners have a maximum amortization period of:
- 25-years for a high-ratio mortgage.
- 30-years for a conventional mortgage.
For more differences between a mortgage term and an amortization, read this.
When it comes to the payment plan, which includes the interest rate and the option for pre-payments (extra payments to pay the total mortgage quicker), there are also two different mortgage types:
- Open Mortgages
- Closed Mortgages
Don’t forget the Canadian Mortgage Stress Test
This type of mortgage allows the homeowner more flexibility for their payment schedule. While interest rates will generally be higher with an open mortgage, this feature allows the homeowner to make extra payments, in addition to their regular ones.
As a result, the homeowner can:
- Pay off their mortgage before the end of their term
- Renegotiate their mortgage before the end of their term
- Break their contract in order to switch lenders before the end of their term
- Reduce their amortization, potentially saving them money
- They can do all of this without any prepayment penalty fees
This is a better option if the homeowner is:
- Planning to sell and change homes in the near future
- Paying their mortgage sooner using the extra money and lump-sum payments.
Limit the amount of extra money the homeowner is permitted to add to their mortgage payments. This is known as the “prepayment privilege”. While most closed mortgages don’t allow extra payments, meaning the amortization period is non-adjustable once the contract is signed, the interest rates are often lower than those of an open mortgage.
As a result, the homeowner is charged a prepayment penalty if they:
- Make extra or lump-sum payments
- Break their contract
However, this is a better option if:
- The homeowner remains in their home for the duration of their amortization
- Their prepayment privileges provide enough flexibility for the prepayments they decide to make
There are six mortgage payment frequency options you can choose from, four regular types and two optional, accelerated types. Make sure to consider how each will affect your finances before you choose.
- Monthly – As already mentioned, monthly payments involve making one payment per month, for a total of 12 annual payments.
- Semi-monthly – These require two payments per month for a total of 24 annual payments.
- Bi-weekly – These involve one payment every two weeks for a total of 26 annual payments.
- Weekly – One payment is required per week for a total of 52 annual payments.
- Accelerated bi-weekly – One payment equal to 50% of the monthly payment is made once every two weeks.
- Accelerated weekly – One payment equal to 25% of the monthly payment is made once a week.
Now let’s address the most notable feature of a mortgage: the interest rate. The interest rate refers to how much you’ll pay the lender for their services and the money you’re borrowing, on top of your regular payments. The lower the rate, the better. Even a fraction of a percentage point can translate into tens of thousands of extra dollars spent on interest over the life of the loan.
Fixed rates don’t fluctuate over the course of the mortgage term. This is often an attractive option for those who like the predictability of their mortgage payments, especially when it comes to sticking with a budget. A fixed-rate can also be better if general interest rates are predicted to rise in the near future.
Fluctuate throughout the mortgage term, according to the market prime rate, which can sometimes be lower than most fixed-rates. If interest rates drop, you could save some money. However, if they rise, the opposite will occur.
Want to know how to deal with rising interest rates in Canada? Click here.
Fixed Payments With a Variable-Rate
Here, if the prime rate goes up, a larger portion of your regular mortgage payments will go toward the interest, rather than the principal. However, if the prime rate drops, a larger portion will go toward the principal, meaning you’ll have a shorter amortization. If the prime rate reaches a certain level, otherwise known as a “trigger point”, your lender might increase your payments, which likely means that you’ll pay off your mortgage within the allotted timeframe.
Adjustable Payments with a Variable-Rate
Here, your payments will fluctuate along with the prime rate, with a set amount going toward the principal and the interest portion varying according to the current rates. This way, you’ll know in advance how much of the principle will be paid off by the end of your term.
Security Registration For Your Mortgage
All lenders apply a “charge” for the possibility of their borrowers defaulting. It’s set in place so that the lender can sell the house if the borrower does not honour their payment schedule. There are two types of charges, both of which will be “discharged” once the borrower pays their mortgage in full. Make sure to talk to your lender about their charge policies, as certain lenders use only one of two possible types and some costs may be associated with the discharging process.
The Standard Charge
This is only secured against the mortgage loan detailed within the contract and not against any other loans the borrower has with their lender (lines of credit, etc.). The charge is registered for the mortgage amount.
The Collateral Charge
This is used to secure more than one type of loan with a lender, including lines of credit and mortgages.
Portable or Assumable Mortgages
These types of options are often made available for those who plan on selling their home or moving before their amortization is over.
Allow homeowners the option of transferring their mortgage from their existing home to a new one, if and when they sell. This way, the homeowner can remain with their current lender, transfer their remaining balance and receive the same interest rate, terms, and conditions.
Check out this article for more information about portable mortgages.
Allow homeowners to take possession of or “assume” another homeowner’s existing mortgage, and vice versa. This is a favourable option for anyone who’s downsizing to a less costly dwelling but wants to avoid the prepayment penalty for breaking their contract before their term ends.
Another feature in some contracts, the cash-back option grants you a portion of the total mortgage amount, as soon as you’re approved, in cash. With this extra cash, you can buy furniture or deal with any legal fees associated with the mortgage itself. However, if you select this option, you’ll likely pay a higher interest rate, which could cost you more in the long run. Also, if you decide to renegotiate, transfer, renew or terminate your current mortgage contract in any way, the cash-back money will have to be returned in full before the end of your term.
Interested in more information about cash-back mortgages? Click here.
Insurance For The Home’s Title
A home’s “title” is a legal term used to determine who actually possesses the property that the house is built on. Once you purchase a home and the title is re-signed in your name, as part of your mortgage contract, your lender may require you to purchase title insurance, which is a one-time expense or premium.
Currently, there are two kinds of title insurance:
- Lender’s Title Insurance – is established to give the lender some protection until the mortgage is paid in full.
- Homeowner’s Title Insurance – is established to protect you from certain losses for the time that the title is in your name, even if your mortgage is paid in full.
Reviewing Your Contract For Errors
Unfortunately, some lenders have been known to make small, but critical errors within their contracts, ones that could cost you hundreds, if not thousands of dollars extra, if not corrected. Always make sure to check that all the mortgage rates and terms are accurate. It’s also very important to make sure your contract discloses all the possible fees and penalties associated with the mortgage itself. This should be done before the mortgage contract is signed, as after it’s signed, the homeowner will be charged a penalty fee for every correction that needs to be made before the contract is up for renewal.
Ready to Apply For a Mortgage?
A mortgage is a crucial component to buying a home, but as expensive as they are, you may be able to negotiate many of the features. Having said that, you’ll be in a much stronger negotiating position if you have a strong credit score, a good income, a low debt load, and a decent down payment.
To make things easier for you, consider enlisting the help of a mortgage broker who can help negotiate all terms of the mortgage for you. Let Loans Canada connect you with a mortgage lender who will be able to offer you mortgage products that suit your financial situation.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.