5 Tips to a Sleep Easy Mortgage
Mortgages are complex, long-term contracts that are difficult to understand for us mere mortals, so educating yourself on mortgages will ensure you have a positive experience and peace of mind for the life of your mortgage. To set you up for success, we have put together a list of five tips to keep in mind to ensure you’re getting your Sleep Easy Mortgage.
Tip #1: Shop your mortgage to numerous lenders
How else will you know for sure that you received the best rate and, more importantly, a mortgage that lets you sleep easy at night? This is true for both new mortgages as well as renewals.
The task may seem daunting if you go it alone, but by utilizing the services of an experienced mortgage broker, you’ll have instant access to over 50 lenders and an expert on your side each step of the way negotiating for you by finding the most suitable mortgage to meet your unique needs. Plus, your credit report will be accessed only once, negating the adverse effects that multiple inquiries have on your credit score.
Tip #2: Don’t focus on just the mortgage rate
The terms, or fine print, are equally, if not more important than the mortgage rate! The mortgage contract, also known as the Standard Charge Terms, is anywhere between twenty-one to thirty-two pages long. The interest rate information is mentioned across only four to six paragraphs! Know there is a lot more to a mortgage than just the interest rate.
Always ensure you have the Standard Charge Terms fully explained to you and always ask questions on anything you need clarified. At Sleep Easy Financial, our licensed mortgage agents will usually spend about a half-hour with you going over the Standard Charge Terms. After all, how else will you know you've received your Sleep Easy Mortgage if you aren’t even aware of what’s in it?
Tip #3: Know your prepayment penalties
There are two rates when taking a mortgage - the one you get going in and the one you get coming out! The rate you get coming out is used to calculate your prepayment penalties. Ensure you understand how your prepayment penalties are calculated should you need to break your mortgage before the end of its term. The fine print in the Standard Charge Terms will prescribe how the prepayment penalty will be calculated when breaking your mortgage midterm. All lenders calculate this penalty differently, and the penalty can vary up to tens of thousands of dollars across lenders. The major banks have, by far, the harshest prepayment penalties as they calculate the penalty based upon the discount you received off the posted rate at the time you took out your mortgage.
Borrowers break their mortgage prior to the term’s maturity for a number of reasons – they switch lenders to take advantage of a lower mortgage rate, they refinance their home in order to take out equity, they consolidate all of their existing debts, or they have sold their home. Given that close to three-quarters of all 5-year mortgages in Canada are broken early, paying extra attention to prepayment penalties at the beginning can save you a significant amount of money and preserve your equity down the road.
Tip #4: Know your down payment options
Carefully weigh your down payment amount and what it means to your savings - especially if you’re a first-time homebuyer. As the saying goes, “A bird in the hand is worth two in the bush” can be applied to your down payment as well. We have come across many homeowners who are surprised to learn that an extra $10,000 of down payment (or 2% on a $500,000 home) works out to approximately $40 less each month (or $1.32/day) on their mortgage payment. So consider which scenario will help you sleep easy at night - paying $40 extra each month on your mortgage or having an extra $10,000 set aside in a high-interest savings account in case of an emergency.
This is an important consideration for first-time homebuyers as they generally have less than a 20% down payment. Down payment amounts of 20% or less are largely gone and cannot be accessed in the future on a mortgage refinance or equity takeout. The only time it can be accessed is when the homeowner decides to sell the property. On the other hand, accessing the down payment greater than 20% will involve legal fees, administrative costs, and possibly prepayment penalties.
Sure, sometimes home buyers need to use all of their savings to get into their dream home. But if you can purchase the same home with a lesser down payment, meaning money in the bank for you, then why not keep some of it in case for a rainy day?
Tip #5: Undergo a mortgage checkup
If you have a fixed-rate, closed mortgage with around two years remaining on your term, it may be worthwhile to explore breaking your existing mortgage and opting for a new mortgage with a lower rate. Many Canadians have benefited over the past several years by employing this strategy. In fact, this is such a popular strategy in the mortgage industry that it has even been given a name - the ‘Break and Run’ strategy. This strategy assumes the savings from changing to the lower rate will more than offset the prepayment penalty charge over the next five years.
However, the benefits are dictated by how your present lender calculates the prepayment penalty as well as the length of your mortgage term remaining. Our licensed mortgage professionals can perform a complimentary mortgage checkup and let you know if this strategy is appropriate to your situation. We’ll also let you know if there are any additional incentives or deals available that reimburse some or all of your prepayment penalties. Often your penalties can be minimized when we find a new lender anxious for your business. Also, if you switch and keep your mortgage amount the same, there are usually no legal fees involved, just a simple ‘no fee’ switch to the new lender.
Bonus Tip: Be aware of a collateral charge mortgage
A collateral charge mortgage is a way of registering a mortgage against the property’s title and has little to do with the type of mortgage. Originally, a collateral mortgage registration was used for a mortgage if it contained a Line of Credit component. However, for reasons we’ll discuss shortly, banks are now instructing lawyers to register all of their mortgages as collateral mortgages – even regular mortgages without a Line of Credit component! It is when your regular mortgage is being registered as a collateral mortgage that you need to stand up and take notice.
A collateral mortgage was originally designed so that a homeowner could easily access equity in their home whenever needed. The major banks gave these collateral mortgages fancy names such as FlexLine and STEP. Although great in principle and satisfying a specific need of the market, the main issue with all registered collateral mortgages is that once you get in one, it is expensive to get out while your financing options are limited during the entire amortization (life) of the mortgage. For example, adding a second mortgage or a Home Equity Line of Credit (HELOC) to a property with a collateral charge is generally prohibited by the mortgage contract. To do so requires discharging the collateral mortgage first, resulting in costly legal, discharge, and administrative fees. Furthermore, a collateral mortgage is not transferable to another lender without discharging it first - even at renewal - as it may include conditions that another lender is not aware of or deem undesirable. It should go without saying that if other mortgage lenders are weary of collateral mortgages, then so should you be.
For these reasons, banks have now taken on the practice of registering ALL of their mortgages as collateral mortgages without even informing their customers! Borrowers usually only learn they have a collateral charge mortgage when they seek additional financing or try to switch their mortgage in favour of a better product or a lower rate. In the mortgage industry, collateral mortgages are known as a customer retention product that strongly favours the lender.
If you decide to go with a mortgage that has a Line of Credit component, then you will have no choice but to have it registered as a collateral charge. However, if your mortgage does not have a Line of Credit component, then make sure you have your lender have it registered as a regular mortgage.
Sleep Easy Financial has access to 90+ mortgage lenders including the big banks. We beat the banks’ mortgages and our services are at no cost to you as we get paid by the lenders. Whether it’s for your next home purchase, mortgage renewal or refinance, our licensed mortgage professionals are committed to getting you your lowest rate so you save as much money as possible. We help you at every stage of the journey and are with you for the life of your mortgage. Be mortgage savvy and let us shop your next mortgage for you.
Sleep Easy Financial mortgage and home financing services are available across Mississauga, Brampton, Cooksville, Malton, Etobicoke, Scarborough, East York, North York, Toronto, Hamilton, Milton, Markham, Woodbridge, Vaughan, Ajax, Pickering, Kitchener, Richmond Hill, Whitby, Oshawa, Guelph, and the surrounding areas. Learn about our mortgage services by clicking here.