After your Offer to Purchase has been accepted and your home inspection has passed, you’ll need to get your mortgage financing in order. Once your mortgage broker or lender knows the mortgage loan amount you’ll need to borrow, they’ll be able to write up your mortgage agreement, and explain all of the terms and conditions that will come with it.
Remember that when you take out a mortgage loan, you need to think about more than just whether or not you can get the best mortgage rate, as some terms and conditions can be costly down the road. Below are some of the most common ones you’ll see in a mortgage agreement. Read through them all to find out why each one should be carefully considered before you sign on the dotted line.
Collateral vs. non-collateral mortgage
Depending on which lender you get your mortgage from, you may or may not have the option to get a collateral mortgage. A collateral mortgage is a readvanceable mortgage product that allows you to borrow money from your home throughout your mortgage term, without having to refinance your mortgage (and pay legal fees). Sounds ideal, right?
The downside to a collateral mortgage is that it cannot be transferred from one lender to the next – not even at the end of your mortgage term. If at any point during the life of your mortgage you wanted to switch lenders, you would need to hire a real estate lawyer to get you out of your collateral mortgage contract.
Most Canadian lenders offer collateral mortgage products, but beware there are two banks that only offer them: TD Bank and ING DIRECT Canada. Before you sign your mortgage agreement, ask your broker which mortgage product makes more sense for you, and make sure you understand the implications of signing on for that commitment.
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Portable or assumable
Another thing you’ll want your mortgage broker to explain to you is whether or not your mortgage is portable or assumable . If you think there’s a chance you will need to sell your home before your mortgage term is up, having the option to port or assume your mortgage could come in handy.
If you are buying a new home at the same time you’re selling your current home, a portable mortgage will allow you to move your mortgage – with its mortgage rate and terms – from one home to the next. By porting (a.k.a. keeping) your existing mortgage, you can avoid having to pay the prepayment penalty that would result from breaking your agreement before your term was up. Unfortunately, not all mortgages are portable. For example, most variable rate mortgages cannot be ported.
If you’re simply selling your home and not purchasing a new one, it may be advantageous to have an assumable mortgage. With an assumable mortgage, you can transfer your current mortgage – with its rate and terms – to the buyer of your home. Again, this helps you avoid having to pay the prepayment penalty involved with breaking your term early. It can also make your home seem more attractive to potential buyers, especially if you have a low mortgage rate, and rates are going up.
Another thing you’ll want to discuss with your broker or lender are the prepayment options that come with your mortgage. Each mortgage product comes with a different set of prepayment options, which will give you the flexibility to increase your monthly mortgage payment amount and/or make a lump sum payment on your mortgage without penalty.
Your prepayment options will likely look something like this in your mortgage agreement: 10/10, 15/15, 25/25, etc. Those are just example numbers, but let’s look at what one of them means. If your mortgage came with 15/15 prepayment options, you could increase your monthly mortgage payment amount by 15% once each year and/or make lump sum payments anytime throughout the year totaling no more than 15% of your mortgage balance.
If you have the extra cash flow in your monthly or annual budget, taking advantage of your prepayment options will help you pay off your mortgage sooner without facing the prepayment penalty you would normally incur by doing so.
Finally, let’s look at the prepayment penalty we keep talking about. The prepayment is the fee you would pay if you broke your mortgage term early. Some of the reasons you might break your term early include: refinancing before your term is up, selling your home before your term is up and coming up with the cash to pay down your mortgage early (or pay it off entirely).
If you had a variable rate mortgage, your prepayment penalty for any of these situations would be three months’ interest. If you had a fixed rate mortgage, however, your penalty would be the greater of three months’ interest and the interest rate differential (IRD). Click over to read more about how these penalties are calculated.