For those in BC who are actively looking to purchase property, whether it be for personal use or as an investment, it is more than likely that you will need a mortgage to do so. Unless you have the means to pay for the property in full, you will need to borrow a portion of the funds when you decide to purchase. Prior to this important decision, there are several key factors you must consider to ensure that the mortgage is right for you. Since you are taking upon yourself the single largest financial obligation in your life, you want to be certain that the loan you decide to take on meets your needs.
We’ve whipped up a list of terms you to keep an eye out for to take into consideration when entering into a mortgage agreement:
Interest Rate & Compounding Period:
Most consumers look to the interest rate as the determining factor when making their decision on a mortgage. It seems to register as the one single cost and obsession associated with borrowing money, and this pretty much makes up most people’s minds. The interest rate is extremely important, but as you will see it is not the only cost of the loan, and there are other important considerations.
Mortgage interest rates are calculated as either a fixed or variable interest rate. A fixed interest rate will do just that, it will remain constant for the term of your loan. In other words, your interest rate will stay the same each month, as will your mortgage payment. The variable rate means that the interest rate may change each month, as the rate is variable or as referred to as a floating rate. Any potential variable rate movement may be caused by the lender adjusting their prime lending rate. Rate changes by the Bank of Canada or changes in economic conditions may set off variable interest rate changes. Even though your monthly mortgage payment would stay the same with a variable rate mortgage, the amount allocated towards principle and interest of the payment, may be adjusted. If the variable rate goes down, you are paying off more principle and less interest with each payment, and vice versa.
The second item you want to know about the interest rate, is the compounding period. In other words, the interest charged on the interest owing, will determine the total amount of interest that you pay on your mortgage. The more frequent the compounding period, the more interest you will pay. It is important to verify the compounding period of your mortgage, as this can potentially save you thousands.
Length of Mortgage:
The length of the mortgage usually refers to the term, or length of time the lender will lend you the funds. The term of a mortgage may range from 6 months to 10 years and beyond. At the end of each term, the unpaid balance of the mortgage and interest become due and payable. Typically, the lender will send a renewal notice to the borrower at the end of the mortgage term. The renewal period will allow you the opportunity to renegotiate another term with the current lender, or the option to go and search out a new competitive lender with more favourable terms. The term of the mortgage should also be an important consideration. You must determine how long you are willing to commit to an agreement with the lender, all things considered.
Amortization is the length of time over which the mortgage payments are calculated & spread, based on the assumption that the mortgage will be fully paid over that period. Most mortgages are amortized over a 25-year period, but this can vary. In some cases, you may request an amortization which works best with your budget. You may insist on paying the mortgage down quickly and so want a short amortization, or you might want to keep your payments to a minimum and so a longer amortization will work best. Not every lender is amortization flexible, so you should certainly ask the lender about their options regarding the amortization of their loans.
Open or Closed Terms:
Open mortgages allow for plenty of flexibility to the borrower. It allows you to pay off or pay down the mortgage without any limit, penalties or extra costs. Also, you may up the monthly payment at any time and pay the loan down faster as you wish.
A closed mortgage locks you into the term for a fixed period of time. You may not pay the loan off or down as you wish, without being subject to a potential interest penalty. The costs to pay out a closed mortgage can be extremely expensive. Some lenders will charge the greater of a 3-month interest penalty or an interest differential investment rate, as a prepayment penalty of a mortgage. In some cases, the lenders will not allow payout of the mortgage unless the house is sold. It is super important to learn the costs associated with the closed terms of the loan with the specific lender.
The mortgage payment frequency schedule has many options available. Lenders will offer weekly, bi-weekly, and monthly payment options. As you know, the more frequently you make mortgage payments, the lower the amount of interest that you will be paying and the faster you will pay off your loan. You will need to make for certain which payment frequency works best with your pay schedule and lifestyle. This is because it is not possible to switch up payment frequencies in the middle of the loan term. Therefore, make for certain you are comfortable with the loan payment frequency.
The prepayment privilege you must investigate if you have decided to take a closed mortgage term. An open mortgage is not bound to any limitations and may be paid down or out without any penalty, anytime. With closed mortgages, your hands are somewhat tied when it comes to prepaying the loan. Closed mortgages permit prepayment in a certain manner and at certain stages of the loan. As a result, you may be permitted to prepay the loan by a preset percentage of the total loan each year. In other words, the lender may only allow the loan to be paid down by a maximum of 10-20% annually. Additionally, the mortgage payment may only be increased by a set percent each year as well. As you can see, there are limits set out by the lender reducing the loan flexibility, unlike the open mortgage.
One can understand the unbelievable difference this would make in terms of saving on interest and reducing the amortization period. Every time a prepayment is made, or every time you increase your monthly payments, the balance outstanding and the monthly cost of interest is reduced. Prepayment options should be seriously looked into as it can save you thousands.
Assumability references that the buyer of your property will take over the obligations of the mortgage you are currently in. Not all mortgages are assumable, and each mortgage contract will specify an option for a potential buyer to assume. Most lenders would prefer to be paid out in the event that a property is sold, but many lenders do have clauses in their loans, indicating that the mortgage is assumable upon qualification.
Mortgage portability is a feature that if you sell one property and purchase another while you are in the middle of your mortgage term, you can transfer the mortgage to the new property. You may consider this when you have a low interest rate and wish to maintain it, as you move on to a new property. Also, if the loan and terms you currently have are pleasing and advantageous to your situation, you would want to port to the new property. Again, the portability feature is dependent on the new property qualifying to the standards of the lender.
Closing costs are the fees associated with getting a mortgage. In most cases, the cost of getting a mortgage through a bank will include lawyer costs, appraisal fee & taxes. These are pretty standard for any bank mortgage. You will be responsible for the cost of paying a lawyer to review the terms of the loan, and the cost of getting the property appraised. However, if you need a personal loan or mortgages services from B-Lenders or private mortgage lenders in BC, there may be additional costs such as a lender fee and mortgage broker fee. Additionally, you would be responsible for the private mortgage lenders’ legal fees. The costs associated with B-Lenders & private hard money lenders may become extraordinary.
It is best to obtain the services of a mortgage specialist, so they can discuss your information and determine how you can benefit from the numerous mortgage options available to you, leveraging the many lenders in the marketplace. Whether you are looking for hard money lenders in BC, bridge loans, a home equity loan, or simple advice to weigh out your options, give us a call today and we’d be happy to engage in a friendly conversation.
Silver Hill Blog
Jim Horvath is the principal broker and director of Silver Hill Mortgage Corp., arranging mortgage loans for over 25 years.