Friday, April 25, 2014

Is getting the lowest interest rate the most important consideration when obtaining a mortgage?

Rate is definitely important, but so are the terms and conditions that go with the mortgage.  For example: the Bank of Montreal is offering 2.99% fixed on their “low rate” mortgage but is that really the best mortgage for you?

Let’s look at the requirements of the low rate mortgage.  First of all, with this type of mortgage, the prepayment options only allow for a 10% increase in your regular payments and a 10% annual lump-sum payment. While this may look great, most institutions will allow up to 20% increase for both.  This is useful if you should decide to double up any monthly payments and/or increase the amount of your regular payments by 20%.  To put that in perspective, on a $200,000 mortgage this means the difference of being able to pay up to $40,000 annually versus $20,000 annually, plus being able to double up monthly payments (which may be more affordable).  This simply can’t be done with the BMO low rate mortgage.

The second area to be aware of with the five-year low-rate mortgage is full repayment before maturity can only occur if the property is sold to an unrelated purchaser at fair market value or if the mortgage is refinanced into another BMO mortgage product.  Prepayment charges will apply.  Your first thought may be “well that won’t matter to me, I won’t need to do anything in the first five years”; however, the majority of five-year borrowers renegotiate their mortgage before maturity, and only a minority of people actually pay a penalty.  With the BMO product, you would not have the option to do a “blend and increase” avoiding the penalty, you would be required to pay it even if refinancing with another BMO product.  So what does this really mean in dollar and cents?  If you have a mortgage and balance is $200,000 and you are three years into the term and need to add $30,000 to the mortgage for renovating your home, you could be hit with at least a three month interest penalty of $1495.00. Plus you could have your mortgage written at a higher interest rate at the time you refinance.  If you had a mortgage at the credit union, you would get the option to blend and increase your mortgage, without the penalty, and the rate would be blended so that it wouldn’t be as dramatic a rate increase as it would be if you had to take a brand new term.  When you are shopping for a mortgage, it is always best to understand how the penalties are calculated, as most people who pay penalties never expect that their circumstances will require it.

When picking a mortgage term and rate it is important to look at more than just the rate.  Compare the features and benefits of the mortgage against your lifestyle and where you will see yourself over the term of the mortgage.  For example, if something happened to the roof of your house within the next five years, how would you plan to fix it?  Where would the funds come from and how would you manage it?  Having a flexible mortgage could allow you to refinance and get the funds needed to repair your house where as an inflexible mortgage could put you into a worrisome struggle trying to find the funds to keep your house in proper repair.