If you’re ready to take out a mortgage, you want to do your best to lock in the lowest interest rate possible in order to help you save a sizable amount of money over the life of your loan. But at the same time, you’ll also need to consider how flexible you need the mortgage to be (is the lowest mortgage rate always the best options?).
Will you want to break the mortgage early? Repay it in full early? Refinance with another lender before the term is up? All of these scenarios can come with a penalty fee that you may be charged if there are restrictions in your contract that do not allow for such actions.
Your job is to determine what features are worth paying a little extra for so you can avoid these penalties versus those that aren’t worth it to you.
Let’s go into a little more detail about mortgage flexibility to help you make sure all the terms of your loan contract suit you best and save you money.
What is a Flexible Mortgage?
Simply put, a flexible mortgage is one that comes with all the bells and whistles and allows for plenty of flexibility if and when your needs change at some point throughout the mortgage term. For instance, you might want to exercise your right to refinance your mortgage or prepay a large part of your principal if you happen to come upon a lump sum of money.
That said, a flexible mortgage will cost you more in terms of fees. If you want to go for a cheaper rate, you’ll need to forgo things like prepayment privileges or refinancing flexibility. But if components like these are a must for you, you’ll have to pay a bit more for them.
Having said that, you don’t necessarily have to pay an arm and a leg for the mortgage you want. Instead, all you need to do is assess your needs for today and what you may need in the future and only add the specific features you require. All you really need is the ideal combination of features at a low rate.
You’ll need to consider all your options and think about what is worth paying for and what isn’t. Here are some options that you can pay for that will provide you with more flexibility in a mortgage:
Prepayment option – A prepayment penalty is a fee charged for repaying your mortgage ahead of schedule. If you have a prepayment penalty clause in your loan contract, then you’ll face a penalty for paying your debt off early. You’ll want to get familiar with the terms of this fee in your particular contract.
Early repayment option – Most mortgages allow you to pay a lump sum toward your principal once a year over and above what you pay in regular payments. But if you pay your mortgage off before the stipulated maturity date, you could be required to pay an early repayment penalty fee. An open mortgage may allow more flexibility with this, while a closed mortgage will likely only allow you to make one lump sum extra per year up to a maximum of 20% of the remaining mortgage balance.
Adjustable payment option – With an adjustable payment option, you’ll have the flexibility to change your mortgage’s amortization schedule. For instance, if you’re currently making bi-weekly payments, you can change the schedule to monthly payments to suit your needs if your mortgage allows for such flexibility.
Option to refinance with another lender – Certain terms on a mortgage contract restrict borrowers from leaving their original lender and switching to a new one before the term is up unless the home is sold. If your contract contains these restrictions, you may not be able to switch lenders if you choose to refinance your mortgage before maturity. But if you pay a little extra, you may be able to have the flexibility to change lenders before your term is up, regardless of whether or not you sell first.
Check out this mortgage refinancing checklist, click here.
Portability – When you move, you may be allowed to take your mortgage with you if you have portability built into your home loan. As such, you can avoid a penalty for breaking your mortgage early and keep your low-interest rate. While most mortgages these days are portable, some might have certain restrictions. For instance, your lender might force you to close on your current home sale and new home purchase within a certain time frame, which can be tough to time perfectly.
Flexibility or Lowest Interest Rate?
When it comes to paying the lowest amount of money on a mortgage, the best way to save money is by snagging the lowest interest rate. But is that really all there is to it?
Granted, a lower rate could certainly save you tens of thousands of dollars over the life of your loan, or more. But there’s something to be said about how flexible your mortgage is. After all, if you try to make a variety of changes to your mortgage throughout the term or amortization period despite restrictions in your contract, you could be faced with some hefty fees to pay which could cancel out any savings you may have realized as a result of a lower interest rate.
The truth is, sometimes home loan products with lower interest rates come with more restrictions. And these come with penalty fees if you break any of the terms in your loan contract. You’ll want to make sure you’re aware of all the conditions in your mortgage contract.
Why Restrictive Terms Can Cost You
As mentioned, you want to have some flexibility to suit your needs now and into the future. If you know that you’ll need certain flexibilities, such as the ability to prepay your mortgage early when you come upon more money, then having terms that are more flexible and allow for this will save you in unnecessary fees.
For instance, if you think you may need to have the flexibility to break your mortgage early, then you’ll be charged a break fee. In a case like this, you may actually be spending more money on these fees compared to the money you saved with a lower interest rate. That’s why it makes sense to pay for flexibility in this case.
At the end of the day, the most affordable mortgage is one that comes with the features that are right for you and allow you the flexibility needed without having to pay for anything extra. And with that flexibility, you’ll be able to take certain steps without being penalized for them or paying for any features you don’t need.
Did you know what mortgage interest rates can vary by province? Learn more here.
How to Choose The Right Mortgage For Your Needs
There are so many variables to consider when choosing a mortgage product. But for the sake of mortgage flexibility, it really comes down to whether you should choose an open or closed mortgage.
The biggest difference between the two is how much flexibility you get when it comes to making extra payments every year or repaying your mortgage off completely before the maturity date in your contract. Let’s look at each in more depth.
Open mortgages – The rate on an open mortgage is generally higher compared to a closed mortgage with the same term length because it provides more flexibility when it comes to putting extra money toward your mortgage in addition to your regular payments. You are free to do any of the following without being subject to a penalty:
- Put more money toward your mortgage in addition to your regular payments
- Pay your mortgage off entirely before the term ends
- Renegotiate your mortgage terms before the term ends
- Break your mortgage contract early to change lenders before the term ends
Closed mortgages – Unlike an open mortgage, a closed mortgage does not allow for as much flexibility, and as such, the interest rate is typically lower.
With a closed mortgage, you’re limited when it comes to the amount of extra money you’re allowed to put toward your mortgage every year in addition to your regular payments without being faced with a penalty. While you may be able to put a certain amount extra once per year toward your principal, there will typically be a limit to how much. Not all closed mortgages allow prepayments, though this varies from one lender to the next.
In closed mortgages, you’ll likely be charged a prepayment penalty in any one of these scenarios:
- A prepayment is made that’s more than what is allowed as per your contract
- You break your mortgage contract
So, which one is better for you? You might be fine with a closed mortgage if you’re not planning to move before your loan term is up or if you feel that you have enough flexibility when it comes to your contract’s prepayment privileges. On the other hand, an open mortgage might be best if you plan to move or pay your mortgage off before the term ends, or if you think you’ll be able to come across a lot of money that you can use to put towards your mortgage.
While it’s always a good idea to shop around for the lowest interest rate, it’s also wise to consider restrictions and flexibilities that come with your mortgage. Depending on your particular needs, you may feel that it’s worth paying extra for flexibility, or you may find that you don’t need such flexibility. And in the case of the latter, it may not be worth it for you to pay extra.
If you’re interested in getting a mortgage, apply with Loans Canada today. We’ll connect you with a mortgage lender who can best meet your needs.
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.