Understanding your mortgage options

Question

I am getting ready to renew my mortgage and want to make sure I fully investigate the features available to me. Any advice?

Answer

A mortgage is a mortgage is a mortgage, right?

Wrong.

In addition to getting the lowest rate possible, you can add on various features that allow you to customize your mortgage to suit your needs. I’ll walk you through a few of them below, but I have a note of caution first. Anytime you add a feature on to your mortgage, it can give you more flexibility, but could also raise your costs. So when you’re looking over the paperwork, make sure you do a full cost versus benefit analysis based on your needs.

A great mortgage broker can be a helpful resource. They can explain the various features available and they can go to different lenders to find those features for you at the best rate possible.

Fixed payments on a variable rate mortgage

For some people, it is really important to know with certainty what your mortgage payment is going to be every month. But instead of locking into a fixed-rate mortgage you can actually get a variable-rate mortgage with a fixed payment. If interest rates go up, more of your payment goes towards the interest and less to the principle. And if interest rates go down, more goes to principal and less to interest. This strategy provides you with the certainty of what your payment will be, with the advantage of paying the absolute lowest rate possible.

That being said, if interest rates go up significantly, the bank could require that you increase your payment. So it is best to assume a higher interest from the get-go to give yourself some wiggle room.

Making extra payments

Pre-payments are a great way to pay off your mortgage faster. Some lenders will allow you to make pre-payments on a monthly basis or through annual lump sums. But the rules for making extra payments can vary greatly between mortgages and many will cap off how much you can pay of your mortgage at 20% of your balance owing during a given year.

For example, if you get a tax refund, instead of taking an all-expenses paid trip to Cuba, consider applying that money directly against your mortgage. Extra payments like these can zap years off your mortgage and save you thousands in the process. But it is worth noting that this flexibility can come at a cost: the more pre-payment flexibility you have, the higher your rate because the lender will need to factor in that your mortgage could be paid off faster and therefore make them less money.

Flexible payment features for changing circumstances

Some mortgages will also allow you to take a lower your payments or to take payment vacation. While you should avoid skipping payments, there are times when you might want to do just that? Perhaps you’re planning a sabbatical, going back to school or taking time off work during a parental leave. Or you’re an entrepreneur who could use a flexible payment feature to account for big swings in your income. Or you might work in a field where you don’t get paid for part of the year, like some teachers. If you work in education, you may be able to get a mortgage that allows you to pay more over 10 months so you can skip the payments in July and August, when you aren’t receiving a paycheque.

For this feature to work, the bank will ask you make lump sum payments or pay a little more each month by increasing your regular payments. This builds up a buffer so which will allow you to apply to skip a certain number of payments without incurring any penalties or increasing the length of your mortgage.

There is also a feature that allows you to skip a payment in an emergency. You don’t want to use this feature, but if you need to, some mortgages will let you to skip a payment. You can only use it once a year and you have to pay the amount back during that year.

Three things to watch out for

Cost: Having features like these can increase your costs. Don’t pay for what you don’t need.

Penalties: Understand the restrictions on your mortgage so you can make use of the features and not be hit with penalties.

Availability: Different lenders offer all different options. Do some research to find the features that would be helpful to you, then connect with a lender that offers them.

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.