Understanding your Mortgage Contract
Like most legal contracts, a mortgage can be very complicated. It is important to know and understand what you are committing to and if it’s right for you. Before signing a mortgage contract, you need to be sure that you understand all of the terms and conditions.
Preapproval vs. Mortgage contract
When a lender preapproves you for a mortgage, it is not a guarantee that they will enter into a mortgage contract with you. A preapproval means the lenders is interested in offering you a mortgage. A lender might choose not to offer you the mortgage after closely assessing you and/or the property.
Total cost of the mortgage
The total cost of the mortgage depends on the terms and conditions for paying it back, such as the interest rate and the amount of time it takes to pay off the entire mortgage or “amortization period”. The total cost can be much more than the amount you are borrowing. You need to determine if the rate, amortization period and total cost of the mortgage are right for you.
An estimate of the total cost of borrowing for the term must be provided to you. In most provinces this information will be provided by the person who takes the credit application, such as a mortgage broker. In Quebec, or if you are not using a mortgage broker, this information must be provided by the lender.
Finding payment options that work for you
Mortgages can be paid every week, every two weeks, once a month or twice a month. Make sure that you can handle the frequency, timing and amount of the mortgage payments. Can you afford them and do you understand how they will affect the total cost of the mortgage? Having larger payments will let you pay off the mortgage faster and reduce the total cost of the mortgage. But make sure you can afford the payments, plus all of your other expenses.
The interest rate will also affect the total cost of the mortgage. Choosing a variable, fixed or convertible rate will have an impact. Ask yourself if the interest rate is reasonable for you and if you can afford it.
If the interest rate is variable, there is the risk that it might go up. Even if the rate is fixed, the interest rate can still increase when you renew the mortgage. Increasing interest rates can raise your payment amounts and can make the total cost of the mortgage much higher in the long run.
Watch out for fees and penalties
Not all mortgages are the same. There are often fees and chargeable penalties included in a mortgage contract. Be sure to understand not only which fees and penalties may apply and when, but also how the amounts are calculated. Lenders have to provide you with information on fees and penalties.
Pre-payment Penalty - A pre-payment is when you pay more than the scheduled payment amount or pay off the entire mortgage ahead of schedule. Pre-payments can help you pay your mortgage back faster, but most mortgages have rules and restrictions. Some don’t allow pre-payments at all. Depending on the mortgage, pre-payments can come with costly penalties. Make sure you understand the pre-payment privileges, rules and penalties included in your mortgage and whether they are suitable for you.
Early Exit - With some mortgages, the borrower agrees to continue to make payments for a specific period of time (“term”). Leaving a mortgage before the term has finished can lead to penalties and fees. The amount of penalties and fees depends on the lender and the mortgage contract.
Services - Review the services that might be included in the mortgage agreement. Services usually come at a cost. It’s possible that you may not want all of them. Find out what the costs are, if some of the services are optional, and if you can cancel the ones you don’t want.
Administration & Discharge Fees - If you decide to exit a mortgage agreement, renew the mortgage with another lender or pay the entire mortgage amount early, you may have to pay for the administrative work needed to make the change. Make sure you understand these fees if you are considering changing lenders or exiting the mortgage.
Late Payment Penalties - Your lender may charge you fees and penalties if you are late making a mortgage payment. When these penalties apply and the amount charged depends on the lender. You should understand both the triggers and the amount of these penalties. Also, if you continue to make late payments, your lender may not want to renew the mortgage with you at the end of term. It’s always best to make your payments on time and in full.
Portable Mortgages - Most mortgages allow home owners to keep the same mortgage contract and have it transferred to a new home if they move. This is called mortgage portability. But, if your mortgage does not have a portability feature, your lender could charge a fee if you want your mortgage transferred to a new property.
Change in Use< - Your mortgage might include an agreement on how the property can be used. There can be penalties or you might not be allowed to change how the property is used (e.g., changing your property from a residence to a place of business or a rental property).
Be prepared for renewal
The agreement with the lender is usually for a limited term (often five years) and not for the entire length of the mortgage (i.e., the amortization period). At the end of the term, your mortgage will have to be renewed. There are no guarantees that the lender will renew your mortgage. And, the terms and conditions could change.
It is a good idea to contact your mortgage broker well before you have to renew. If you do not use a mortgage broker, be prepared to look elsewhere to negotiate the interest rate and other terms and conditions.