Homeowners and buyers are in a rather enviable position these days. Interest rates are at historic lows and the cost of borrowing for a home is about as low as it can get.
That’s great news. But it’s not the only thing homeowners and purchasers need to think about when it comes to a mortgage.
There are a number of other features to consider before signing up for a mortgage and what is probably the largest debt that most Canadians will ever take on in their lives.
“When it comes to choosing a mortgage, getting a good rate is just the tip of the iceberg,” said Mary Gronkowski, regional sales director with Mortgage Intelligence Inc., a national mortgage brokerage company. “You have to be aware of all the other features that may lie below the surface. All features of a mortgage should fit a homebuyer’s personal goals, both now and down the road.”
One type of mortgage to consider is an assumable mortgage.
An assumable mortgage means it can be transferred to another borrower. It allows a purchaser to take on your mortgage’s terms and payments as part of the sale of your home.
With extremely low interest rates today, that could be a big selling feature to a potential buyer in the future.
Given the low rates today, many homeowners are thinking about refinancing their mortgage.
Whether you should refinance your mortgage in a period of low interest rates depends on how much it will cost you to break your existing mortgage compared to how much you will save in interest payments.
If you break an existing mortgage you will have to pay the greater of three month’s interest or the interest rate differential (IRD).
An IRD is a penalty for early prepayment of all or part of a mortgage outside of its normal prepayment terms. Usually this is calculated as the difference between the existing rate and the rate for the term remaining, multiplied by the principal outstanding and the balance of the term.
For example, if you had a $100,000 mortgage at nine per cent interest rate with 24 months remaining and wanted to renegotiate your mortgage at 6.5 per cent for 24 months, your IRD would be $5,000 ($100,000 x 2.5 per cent = $2,500 x 2 years = $5,000).
It may only make sense to refinance your mortgage if the interest rate savings over the remaining life of your mortgage exceed the value of the IRD.
Another strategy is to take a variable rate mortgage. If interest rates go down and you keep your mortgage payments the same, you will be paying off more of your principal with each payment and will pay down your mortgage faster.
Many borrowers are taking advantage of low interest rates by accelerating payments on their mortgages. Many lenders will allow you to double up payments periodically or make lump sum payments of up to 20 per cent of the principal once a year.
You should make sure you understand the size and frequency of payments your lender will allow before you sign up.
Some mortgage lenders will have an option to skip a payment without penalty, which may come in handy in today’s economy.
Another option that many mortgages have is portability.
This allows you to transfer your existing mortgage over to a new property, another big advantage if you have a mortgage at current low rates.
Not all portability features are the same, however. Some lenders allow up to 120 days to transfer the mortgage while others allow for only a few days or a week.
“Choosing the right mortgage involves considering where you are now and where you may be three to five years from now,” said Gronkowski. “Working with a professional can help you make sense of the many options available to you.”
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors. He can be contacted at boggsyourmoney@rogers.com.