With a name like Pam Pikkert, I am sure you can understand that I am particularly partial to the alphabet’s most perfectly pronounced letter of P.
I am kidding, of course, but after meeting with a client this week I realized that a pattern was emerging and it all centres around some really important mortgage terms which all begin with the letter ‘P’.
Most of the time we become very focused on the interest rate we are being offered which makes a lot of sense given that it’s the easiest to understand and has what feels like the biggest impact to us as the lower the rate the lower the payment. There is more to a mortgage than this though and discounting the other parts of the mortgage could very well cost you in the long run so take a look at these three P’s.
Portability – Portability is the term for being able to take your mortgage with you from property A to property B without a penalty. Seems pretty straightforward but as always you should look a little deeper.
What types of properties are acceptable to your lender? If your dream includes an acreage with a barn for your horses then you need to ask if your lender likes them too. Not all property types are considered by all lenders so asking ahead of time can save you money later.
What is the allowed timeframe the port has to happen within? If the possession of your existing home occurs before you take possession of the new home you will be required to pay the penalty in full and it will be reimbursed after the fact.
Some lenders allow up to 60 days for this move to happen. I have seen others who require it to happen on the same day or before. This is a very large difference and certainly worth asking about before you finalize your mortgage.
What type of a mortgage will you have if you need an increase?
Most lenders will blend the rate of your current mortgage with the rate being offered at that time for the new funds. You may end up with a rate higher than the best but once you calculate a penalty it can make great sense to choose this route.
Some lenders will split your mortgage into a component A and B. This is a bit of as pain potentially as you now have two payments with two different maturity dates indefinitely.
Penalty – there is no set standard in Canada among financial institutions as to how a mortgage penalty is calculated. Find out before you accept a mortgage offer as to how your lender calculates theirs. This part isn’t at all fun however the onus is actually on you to learn.
A mortgage is a binding legal contract in which the lender is obligated to disclose this formula to you ahead of time.
The other thing to watch out for are additional penalties. Some mortgages offer a really great low rate but if you read the fine print there is an additional 2.75% fee if the mortgage is broken.
Prepayment privileges – there are scads of ways you can pay your mortgage down quickly. Increase your payments, change your payment frequency, or put lump sums against your mortgage. Make sure the pre-payment privileges you are being offered match your strategy. You may want to choose a lower rate in exchange for a decreased prepayment amount if that suits. Or on the flip side if you plan to be very aggressive then make sure your mortgage allows this.
And there you have it! The pointedly poignant look at the particularly perilous p’s of mortgages. Educating yourselves and choosing a well-qualified mortgage professional is your best defense as always!
Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.