Not all mortgages are structured equally

Mortgages that allow you to change terms, make additional payments and ‘transfer’ when you move, offer flexibility and save on interest payments.

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Temptingly low mortgage rates have lured many people into owning their own home. But beware, buyers – choosing a mortgage that looks too good to be true can flirt with disaster.

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A ‘no nonsense’ mortgage with a competitive interest rate is easy as long as nothing changes during the term of the mortgage. But not such a bargain when it comes to refinancing or transferring the mortgage to another property.

“It is not a matter of being punished financially. It’s a matter of not being able to get under your mortgage at all unless you sell,” said Natalie Wellings, a mortgage broker at Verico Compass Mortgage Group in Edmonton.

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“It’s not just about rates. As a wise realtor once said to me, you can buy the cheapest burger, but you also get the best ingredients?”

For example, if we compare a no-nonsense rate of 2.94 percent with a standard rate of 2.99 percent, both over a fixed term of five years, the difference on a $400,000 mortgage is only $10.89 per month.

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“In 60 months, that’s only $650 for something that could cause you so much grief,” Wellings says.

Down payments on no-frills mortgages are possible, but some lenders limit how much is allowed. She says that in her experience, the vast majority of people don’t use additional payment options anyway.

Sticking to a low interest rate and keeping the mortgage intact for the entire term may sound simple, but on average many homeowners think of refinancing within 3.5 years of signing their mortgage papers.

New buyers looking to upgrade their starter home need the flexibility to transfer their mortgage to a new home.

“How a port works is that the existing balance and mortgage interest are transferred to a new property and any increase in the mortgage is subject to the current rates, whatever they are at the time. This is important because interest rates are so low,” said Collin Bruce, mortgage broker and franchise owner of Dominion Lending Centers, Mortgage Mentors in Edmonton.

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The type of rate can be just as important as the percentage point. A flat rate remains the same for the duration of the term, as do the monthly payments. A floating rate is based on the bank’s prime rate, and while the government will move its prime rate up and down, the monthly mortgage payments will remain the same. Only the interest amount within that payment changes. While the monthly charges with a variable rate, also based on the prime rate, do change. Both affect the rate at which the principal can be paid off.

Bruce recommends checking the lender’s policy on making additional payments without penalty. Some accept additional payments at the mortgage maturity, usually 20 percent, while others allow specific privilege payments with each payment.

“If people are concerned about paying off their mortgage faster, that would be something to look at,” he says.

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Not all mortgages are structured equally

Mortgages that allow you to change terms, make additional payments and ‘transfer’ when you move, offer flexibility and save on interest payments.

Article content

Temptingly low mortgage rates have lured many people into owning their own home. But beware, buyers – choosing a mortgage that looks too good to be true can flirt with disaster.

Advertisement 2

Article content

A ‘no nonsense’ mortgage with a competitive interest rate is easy as long as nothing changes during the term of the mortgage. But not such a bargain when it comes to refinancing or transferring the mortgage to another property.

“It is not a matter of being punished financially. It’s a matter of not being able to get under your mortgage at all unless you sell,” said Natalie Wellings, a mortgage broker at Verico Compass Mortgage Group in Edmonton.

Article content

“It’s not just about rates. As a wise realtor once said to me, you can buy the cheapest burger, but you also get the best ingredients?”

For example, if we compare a no-nonsense rate of 2.94 percent with a standard rate of 2.99 percent, both over a fixed term of five years, the difference on a $400,000 mortgage is only $10.89 per month.

Advertisement 3

Article content

“In 60 months, that’s only $650 for something that could cause you so much grief,” Wellings says.

Down payments on no-frills mortgages are possible, but some lenders limit how much is allowed. She says that in her experience, the vast majority of people don’t use additional payment options anyway.

Sticking to a low interest rate and keeping the mortgage intact for the entire term may sound simple, but on average many homeowners think of refinancing within 3.5 years of signing their mortgage papers.

New buyers looking to upgrade their starter home need the flexibility to transfer their mortgage to a new home.

“How a port works is that the existing balance and mortgage interest are transferred to a new property and any increase in the mortgage is subject to the current rates, whatever they are at the time. This is important because interest rates are so low,” said Collin Bruce, mortgage broker and franchise owner of Dominion Lending Centers, Mortgage Mentors in Edmonton.

Advertisement 4

Article content

The type of rate can be just as important as the percentage point. A flat rate remains the same for the duration of the term, as do the monthly payments. A floating rate is based on the bank’s prime rate, and while the government will move its prime rate up and down, the monthly mortgage payments will remain the same. Only the interest amount within that payment changes. While the monthly charges with a variable rate, also based on the prime rate, do change. Both affect the rate at which the principal can be paid off.

Bruce recommends checking the lender’s policy on making additional payments without penalty. Some accept additional payments at the mortgage maturity, usually 20 percent, while others allow specific privilege payments with each payment.

“If people are concerned about paying off their mortgage faster, that would be something to look at,” he says.

Advertisement 1

Comments

Postmedia is committed to maintaining a lively yet civilized discussion forum and encourages all readers to share their thoughts on our articles. It can take up to an hour for comments to be moderated before appearing on the site. We ask that you keep your comments relevant and respectful. We’ve enabled email notifications – you’ll now receive an email when you get a reply to your comment, there’s an update to a comment thread you’re following, or a user follows comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.

Leave a Comment