Mortgage terminology often leaves people looking confused and glassy-eyed. I realize mortgage broker lingo can sometimes sound similar to legal jargon, something most people try to avoid at all costs. Let’s shed some light on a few common mortgage “flexibility” terms so that you can approach your mortgage with more confidence.
Standard Closed Term:
Standard closed terms allow you to leave a mortgage lender or end your mortgage before maturity by paying a penalty. Some lenders offer lower rates for signing with “restricted” closed terms. Is it worth taking the bait? According to Robert McLister, the editor of CanadianMortgageTrends.com and a planner at Mortgage Architects, restricted closed terms are not worth the lower rate. Lenders usually offer 0.10% lower for signing with restricted terms.
Sounds nice, but the catches are severe. If you want to refinance or upgrade your home, you are restricted to the rates your lender decides upon. Lenders can even decline mortgage increases, leaving borrowers in a lurch should they want to move to a more expensive home. About 70% of Canadians break their mortgage before it reaches maturity; something to consider when you sign on the dotted line.
Large, lump-sum prepayments is the amount of money you may pay, on top of your normal mortgage payments, in order to pay down your mortgage faster. A lending agreement can stipulate how much extra you are allowed to pay into your mortgage each year, ranging from 0-30%. The more “extra” you wish to pay a year, the more your mortgage rate will increase. Prepayments are usually underused, with only about 17% of Canadians choosing to utilize this feature.
But prepayments can help reduce your penalty if you break your mortgage early. On average, Canadians paid 7.8% of their mortgages last year. So, it’s safe to say that if you aren’t expecting a huge lump sum in the next few years, a 10% prepayment could be just the ticket to help you pay off your mortgage faster or reduce your penalty.
Flexible portability allows you to take your mortgage with you should you move to a new home, avoiding your breakage penalty and allowing you to keep your low interest rate. Some lenders restrict borrowers to a 30 day (or less) window in which they must close on the sale of their existing home and close the sale of their purchased home. This can be an extremely difficult thing to time. Some credit unions or local lenders restrict portability to within their lending area, meaning a national lender is best if you occasionally move across the country.
Mortgage Increase Flexibility:
Sometimes, homeowners need to increase their mortgage before it reaches maturity, usually by upgrading their home or withdrawing equity from their home. If either are a possibility for you, ask your mortgage broker about lender who can “blend and increase” without a penalty. “Blend and increase” simply means that lenders will allow you to add a new mortgage portion without a penalty or increase your current mortgage without legal fees. Mortgage increase flexibility is not available with all lenders.
A Good Conversion Rate:
If you plan to lock-in your variable-rate mortgage, you should ask your broker about a fixed-rate discount. Some lenders decide what their “conversion rate” policy is on a whim, then, when you lock-in, you are left with the lender’s standard rate, instead of their best rate. A lender who converts you to their absolute best discounted rate could end up saving you quite a bit of money down the road.
Remember, if you ever need help deciphering what mortgage terms, I am always willing to translate! I also have a wonderful glossary that I can send you if you would like one just let me know.