Features You Want To See In Your Mortgage Contract In 2024

A lower rate on your mortgage is ideally what you want. After all, the lower the interest rate, the more affordable the mortgage will be overall. But there are other terms and conditions of the mortgage that should also be compared against other mortgage products. 

Plus, you’ll want 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? 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.

Key Points

• A mortgage contract is an agreement between you and your lender that details all the terms and conditions of your mortgage, including your obligations and that of your lender.
• There are multiple features that should be included in a mortgage contract, along with others that may be optional, depending on your needs and particular situation.
• It’s important to review your mortgage contract carefully and ensure you understand all the terms included before signing, as it’s a legally binding contract.

What Is A Mortgage Contract?

A mortgage contract contains a list of terms and conditions related to the eventual purchase of a home. It’s important to review your contract and understand every feature involved, as the transaction involves hundreds of thousands of dollars. The consequences of breaking a mortgage contract could be worse than a slap on the wrist.  

What Can You Negotiate On A Mortgage Contract?

Several components of a mortgage contract may be negotiated, including the following:

Mortgage Types

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. Moreover, some borrowers may not qualify for all mortgage types.

Conventional Mortgages

These involve a minimum down payment amount of 20% of the purchase price of the home.

High-Ratio Mortgages 

These allow for a minimum down payment amount of 5% of the home’s value. Because of this lower down payment amount, high-ratio mortgages will require default mortgage insurance for the lender to hedge against the risk of the borrower defaulting.

Mortgage Terms

The mortgage term refers to the time frame within which the mortgage contract remains in effect, including the interest rate, fees, and policies.

Short-Term Mortgages

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.

Long-Term Mortgages

This means that you may be able to lock-in a favourable interest rate for a longer period of time. This will save you money and help you budget according to 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. 

Convertible-Term Mortgages

With this type of mortgage term, 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.

Amortization Period

It’s not uncommon to confuse mortgage “terms” and “amortization”, but it’s important to distinguish between the two. While a mortgage term refers to the amount of time your mortgage contract is in effect, the amortization period is the time you have to pay off the full mortgage amount. 

In Canada, homeowners have a maximum amortization period of:

• 25-years for a high-ratio mortgage (with the exception of new home buyers purchasing newly constructed homes, in which case 30-year amortizations are available for high-ratio mortgages)
• 30-years for a conventional mortgage

You can choose short- or long-term amortization periods. Before you make this selection, it’s important that you understand the pros and cons of each:

• Short-term amortization periods — The shorter your amortization, the sooner you’ll be debt-free. Plus, you’ll pay less interest over the life of the loan. However, your mortgage payments will be much higher, which could be difficult for some homeowners to afford. 
• Long-term amortization periods — The longer your amortization is, the lower your regular mortgage payments will be. This can make it easier to afford a home loan and fit your monthly payments within your budget. 

But while these smaller payments can be financially beneficial to some, a longer amortization also means you’ll end up paying more in interest over time. Plus, you’ll be stuck paying a mortgage for longer.

Payment Plans And Prepayment Allowances

When reviewing your mortgage contract, be sure to pay attention to the payment plans and prepayment options. Depending on whether you have an open or closed mortgage, your prepayment options will vary.

Open Mortgages

This type of mortgage offers more flexibility with your payment schedule. While interest rates will generally be higher with an open mortgage, this feature allows you to make extra payments, in addition to your regular ones.

As a result, you can:

• Pay off your mortgage before the end of the term
• Renegotiate your mortgage before the end of the term
• Break your contract in order to switch lenders before the end of the term
• Reduce your amortization, potentially saving you money
• You can do all of this without any prepayment penalty fees

This is a better option if you are:

• Planning to sell and change homes in the near future
• Paying your mortgage sooner using the extra money and lump-sum payments

Closed Mortgages

Closed mortgages limit the amount of extra money you’re permitted to add to your mortgage payments. This is known as the “prepayment privilege”. Most closed mortgages allow a certain amount of extra payments each year, usually 10% to 20% of the original mortgage balance. If you exceed this amount, you’ll be charged a prepayment penalty.

A closed mortgage may be a better option if:

• You plan to remain in your home for the duration of your amortization
• Your prepayment privileges provide enough flexibility for the prepayments you decide to make

Payment Frequency

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. 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 2 weeks.
• Accelerated weekly. One payment equal to 25% of the monthly payment is made once a week.

Interest Rate

The interest rate is the amount lenders charge borrowers and represents a percentage of the principal. In other words, your rate refers to how much you’ll pay the lender for their services and the money you borrow.

The lower the rate, the better. Even a fraction of a percentage point can translate into a difference of tens of thousands of extra dollars over the life of the loan.

Fixed-Rates

Fixed rates don’t fluctuate over 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 soon.  

Variable-Rates

Variable rates 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.

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. 

But while the share of interest versus principal may change, your mortgage payment amounts will remain the same. However, if the prime rate reaches a certain level, otherwise known as a trigger point, your lender might increase your payments. 

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 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 to cover the possibility of 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.

Standard Charge

This is only secured against the mortgage loan detailed within the contract and not against any other loans you have with your lender (lines of credit, etc.). The charge is registered for the mortgage amount.

Collateral Charge

This is used to secure more than one type of loan with a lender, including lines of credit and mortgages. 

However, if you want to leave the possibility of refinancing open during your loan term, consider a non-collateral mortgage. This allows your mortgage to be transferred to another lender, even if it’s not the end of the term. If you have a collateral charge and choose to refinance with another lender, you’ll need help from a real estate lawyer.

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 period is over.

Portable Mortgages

Portable mortgages allow homeowners to transfer 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. 

Assumable Mortgages

Assumable mortgages allow homeowners to take possession of, or “assume”, another homeowner’s existing mortgage, and vice versa. This is a favourable option for anyone downsizing to a less expensive home but wants to avoid the prepayment penalty for breaking their contract. 

Cash-Back Option

Another feature in some contracts is a cash-back option, which grants you a portion of the total mortgage amount in cash as soon as you’re approved. With this extra money, you can buy furniture or deal with any legal fees associated with the mortgage. 

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. So, while this option may sound great on paper, it can cost more in the long run.

Title Insurance

A home’s “title” is a legal term used to determine who legally possesses the property. Once you purchase a home and the title is transferred to your name, your lender may require you to purchase title insurance, a one-time expense or premium. 

Currently, there are two kinds of title insurance:

• Lender’s title insurance. This policy gives the lender some protection until the mortgage is paid in full.
• Homeowner’s title insurance. This policy protects you from certain losses for the time that the title is in your name, even if your mortgage is paid in full.

Discount Mortgage Penalties

If you break your mortgage before the end of the term, you’ll have to pay a mortgage penalty, which can cost you thousands of dollars. That means even if you sell your home before the end of your term, you could be slapped with these unwanted fees. 

If you think there’s a chance that you may need to break your mortgage before the end of the term, find a lender who offers a discounted mortgage penalty. This could potentially save you quite a bit of money.

Reviewing Your Mortgage Contract For Errors

Most lenders are thorough when it comes to drafting loan contracts. Unfortunately, some lenders have been known to make small, but critical errors within their contracts. This could cost you hundreds or thousands of extra dollars if not corrected. 

Always check that all the mortgage rates and terms are accurate. It’s also important to ensure your contract discloses all the possible fees and penalties associated with the mortgage. 

This should be done before the mortgage contract is signed, as after it’s signed, you’ll be charged a penalty fee for every correction that needs to be made before your mortgage is up for renewal.

Additional Reading

Should You Pay Property Taxes Through Your Mortgage?

Best Homeowner Tax Credits In Canada

Mortgage Brokers: Should You Work With One?

Ready To Apply For A Mortgage?

A mortgage is probably the most expensive contract you’ll enter. But as expensive as they are, you may be able to negotiate many of the features, which could potentially save you some money. 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.

Mortgage Contract FAQs

Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.