Getting a mortgage isn't as simple as picking the option with the lowest monthly payments. There are many more variables you should consider which could save you tens of thousands of dollars.
If you've dealt with paying penalties or refinancing mortgage limitations, then you know they can easily outweigh the differences in interest rates. That's what we will discuss here and more.
How to Get the Best Mortgage Rate
1. Preferential Rates
Before you take up a mortgage, you will need to verify whether the lender will give you any preferences based on your credit score and other qualifications.
You also need to ask whether the lender can match a competitor’s rate should you find a better rate.
2. Shop Around
You will need to shop around before you settle on a mortgage option. Check the banks and credit unions. You will need to find the bankers and reps from a credit union because unlike the mortgage brokers, they do not come looking for you.
Use tools such as RateSpy.com that helps mortgage shoppers to benchmark the most competitive mortgage rates.
Ensure that your rate falls between 0.10 and 0.15 of what’s available on this website. Be wary of the cheap rates because they are usually attached to mortgages with very expensive restrictions.
3. Quick Close Rates
You must determine how long your lender will hold your rate. Typically, in quick close rates, the lender will only hold the rates for a period of not more than 45 days.
Another very important thing that you need to look out for is what happens when the rates fall. Will the client adjust your rate or he will keep up with the promotional rates?
Will the lender give a preapproval at the current rate or will he introduce rate premiums? You need to confirm this detail before you sign on the dotted lines. You need to ask whether the lender offers discounted rates at the renewal or just sends renewal letters with an inflated rate and hope that the mortgage shopper will sign it.
Making Payment Tips
Penalty Payments for Prepayments
You need to ask your lender what options there are for prepayments, and what penalty you will accrue should you make the prepayments. The standard closed mortgages allows prepayment of 10% to 30% of the mortgage sum.
Caution: Do not pay more mortgage than you need to as this will accrue some penalty for you. Don’t ignore your prepayment options too as they can help you reduce your mortgage and save you a lot of interest whenever you have cash.
You may be allowed to make prepayments in instalments during the year.
Sometimes the lender will allow you to increase your prepayment by between 15% and 20% every year. If you are lucky, this may go up to 100% double-up payments.
Decide whether you will make your payments weekly, bi-weekly or fortnightly. Sometimes, the best way to go about this is to enroll in the accelerated payments method. It is a smart way of managing a lump sum payment at the end of the year. For example, a mortgage set to mature after 25 years can be turned into a 23 years by enrolling in the accelerated payments.
Ask whether you will be let to pay penalty if you decided to get out of the mortgage. There are no frills lenders who will only let you out if you sold the property while others will let you out only when your term is up.
If you want to get out early, just pay the penalty and choose the lower rate if you are planning to keep the mortgage for more than 6 months.
How to Calculate the Mortgage Penalty
- Fixed rate penalties can be either interest rate differential or 3 months of interest.
- Variable penalties are based on your current rate, but are multiplied by 3.
- Note that rate penalties are always higher than your prevailing rate – sometimes thousands of dollars more. Before you take up a mortgage, you are well advised to check each lender’s rates online.
Pro Tip: Beware of a trick used by most big lenders who instead of giving you a penalty rate based on your current rate, they use the posted rates. Others will charge you the differential penalty when in real sense the 3-month rate applies. Some even go as far as charging you 12-month penalties that is equivalent to 3% of your mortgage balance. Unless there is some significant saving to be made, avoid such lenders.
For those looking for job mobility or those looking to have a larger family, porting your mortgage becomes important. There are lenders who will let you port if your new mortgage is equivalent in price. If the new house is pricier, you will have to part with some penalty.
Unfortunately in Canada, porting across provincial lines has been made harder by the credit unions. Make sure you understand the porting rules before you take up a mortgage. You may even maintain the current rate, with just a little penalty.
Your porting duration is also important. Typically, the longer the better. 60 days or more is preferable. Avoid the lenders who require you to move to your new property the same day you ported your mortgage.
Pro Tip: If you are already in a mortgage that you want to port and they require you to move the same day, make sure you have already booked with relocation services before you port.
There are lenders who will limit you from using your prepayment privileges if you start using them within 30 days since acquiring them. Look for a lender that will allow you to use your prepayment privileges when you want to lower your refinancing cost.
Be warned. If your mortgage has a cash back and you break it even for one day, they will force you to repay 100% of the cash back they gave you. If you cannot calculate the effective rate for the cash back, ask your mortgage adviser to do it for you.
Tips for Refinancing
You can ask your lender whether you can increase your mortgage at discounted rates and without paying penalties.
This is especially important if you want to buy a more expensive house. Be aware that there are some lenders who will charge you penalties for increasing the mortgage. Others will refuse to increase your mortgage entirely.
What you are looking here is to extend your mortgage without incurring penalties and giving up the discounted rates. It is especially useful when your mortgage lowers and you are past your middle term with repaying and you want to take advantage of the new rates.
Avoid lenders that let you extend your mortgage rate at the lower rate and then include a prepayment charge on your new mortgage.
Supposing you have paid 20% of the original principal on your mortgage and a business opportunity comes your way and you do not have enough money to go for the new opportunity. What you do is approach your mortgage lender and ask for a chance to borrow back the repaid principle. It is a cheap source of finance. It may act as a contingency fund.
There are two readvanceables available. The first one is manual that allows you to apply and borrow the paid principle while the other is automatic which makes any down payment of the principle available to you.
Variable Rate Mortgages
Variable rate mortgages will prevent you to port and blend your mortgage rate. In effect, this also lowers your prepayment privileges.
The only advantage of variable rate mortgages is that in the event the rates fall, less of your repayment will go to interest. Unfortunately, if they go up, more of your repayments will go to interest.
Take advantage of the trigger rates in variable rate mortgages. If the rate increase past the trigger rate, your lender should increase your fixed payment amount to cushion you from taking much of your repayment to interest.
There are lenders who only increase their mortgage rate only 3 months after the prime rate has increased. This keeps your rate low for a while longer. Unfortunately, the delay will work against you if the rates go south.
Some lenders have what they call a ‘capped-rate’ beyond which your rate cannot go despite the rise in the prime rate. Make sure you do your math properly before accepting a mortgage.
Converting Variable Rates into Fixed Rates
This is not the best strategy. You’ll never get the best fixed rate by conversion. Predicting interest rates is also very difficult and thus changing to any of the above rates will be counter-productive in the long run.
Use hybrid mortgages to take advantage of either fixed rate or variable rate mortgage. You can divide your mortgage into two parts each featuring any of the above mortgages to diversify your risk.
Pro Tip: Should you opt for both long term and short term rates, your lender will not give you the best rates on your shorter term rate. Again, you will have to pay some penalty to move from your long term rate to short term rate to become less susceptible to rate spikes.
Choose lenders that have 35 years amortization if you are having problems paying your mortgage. If you have come to a sudden windfall and have lots of cash, then you are better off with the short term amortization.
Banks vs. Credit Unions
Either of the lenders can do, but look for mortgage lenders that allow you to settle your payments online. Link your lender to your chequing account to withdraw the mortgage payments automatically.
False Urgency for Renewals
Most lenders offer 120 to 180 day renewals. An early renewal will reduce your risk. Be wary of the lenders that has all these limited offers that lock you before your renewal date.
Arrange for some payment vacations so that in case of emergencies, you will have some leeway. Skipped payments will still accrue interest. Sometimes you will have to make an equivalent prepayment.
Sharing Profits on Mortgage
After 3 to 7 years you will be able to access credit union rebates on interest paid. Before you buy a mortgage, know whether they have interest.
Extra Costs and Things to Consider
- Appraisal fees – Are they based on property-type location?
- Processing fee – Compare processing fees from different lenders
- Cancellation fees – The smaller the cancellation fee the better. You get a better lender and decide to cancel. The fees for cancelling should either be zero or very low.
- Compounded Interest – Are they offering semi-annual compounding interest or monthly compounding? Semi-annual interest costs less.
- Re-investment fees – What are the penalties and re-investment fees that you will be charged should you break your mortgage early?
- Mortgage registration fees – look for lenders that cover this fee especially when the loan amount is not increasing.
- Mortgage as a collateral – Be wary of the collateral charge that allows you to borrow more as your property increases in value. It is a tradeoff that stops you from borrowing anything else against your property.
- Discharge fee – Ask your lender if they will pay your old lender their discharge fee in the event of transfer of the mortgage.
- Title Insurance – In the event of switching mortgage, is your lender ready to pay the $150 to $300 title insurance fee?
- In case you cannot prove your income the traditional way like those who are employed; ask the lender whether you will pay a higher interest based on that.
- Do you need to bundle financial products so that you can access the lower mortgage rates or are you going to get free banking?
- How long will the bridge financing period last in case you want to get money to bridge the gap between the sale of your old home and the acquisition of a new one? Most lenders give 30 days.