Of Prime Interest: Mortgages come in many guises
Homeowners and buyers are in a rather enviable position these days. Interest rates are at historic lows and the cost of borrowing for a home is about as low as it can get. The five-year fixed rate is again available as low as 2.89 per cent and the Variable rate is at prime minus .60 per cent.
That’s great news however it’s not the only thing homeowners and purchasers need to think about when negotiating a mortgage. There are a number of other features to consider before signing up for a mortgage—after all, this is the largest debt most Canadians will take on in their lives.
When it comes to choosing a mortgage, getting a good rate is only the beginning. You have to be aware of all the other features that may lie below the surface. All features of a mortgage should fit a homebuyer’s personal goals, both now and down the road.
Fixed rate mortgage
A fixed rate mortgage will guarantee you a rate for a specific period of time. Fixed rate mortgages are available for terms from six months up to 10 years the most popular being a five-year fixed currently available at 2.89 per cent.
If you need to break the term you will be charged a three month interest penalty or an interest rate differential (IRD), whichever is greater. An IRD is a penalty for early prepayment of all or a portion of your mortgage outside of its normal prepayment terms. Usually this is calculated as the difference between the existing rate and the rate for the term remaining, multiplied by the principal outstanding and the balance of the term and can be very costly.
Variable rate mortgage
There are ways to avoid or at least reduce the IRD. Variable rate mortgages float with the prime rate and are available up to .60 below prime, currently resulting in a rate of 2.4 per cent. If the prime rate changes the interest you are charged and your monthly payment will fluctuate.
You have the option with a variable rate mortgage to convert to a fixed term equal or greater to the period remaining in your term. This option is available at any time and there is no penalty to do so.
Typically variable rate mortgages are for a five-year term but are also available for lesser terms. You will only ever be charged a three-month interest penalty should you break the term in a variable rate mortgage.
Open mortgages are also available but usually at a higher rate of interest.
Always confirm you have an assumable mortgage. An assumable mortgage means the mortgage can be transferred to another borrower. It allows a purchaser to take on your mortgage’s terms and payments (upon qualification) as part of the sale of your home. With extremely low interest rates today, that could be a big selling feature to a potential buyer in the future.
Another option that many mortgages have is portability. This allows you to transfer your existing mortgage over to a new property—another huge advantage if you have a mortgage at current low rates. As well, if the penalty to pay the mortgage off is large, you may port it and reduce the penalty or have no penalty at all.
Not all portability features are the same, however. Some lenders allow up to 120 days for transfer of the mortgage while others allow for only a few days or a week.
Choosing the right mortgage involves considering where you are now and where you may be three to five years from now. Working with a professional can help you make sense of the many options available to you.