The Top 10 Mortgage Mistakes Often Made By Canadians
In several years of working with mortgages, I’ve noticed many people in Canada make common mortgage mistakes when getting a mortgage. People tend to focus too much on small details that don’t matter much while overlooking critical terms in their contracts.
This article is here to help you avoid common mortgage mistakes. It shows you which factors affect how much you borrow so you know what terms to focus on.
Here are ten common mortgage mistakes people often make when looking into mortgages. Shoppers tend to make these mortgage mistakes, but they really shouldn’t!
1. Worry too much about prepayment privileges.
According to a study by Mortgage Professionals Canada, only one out of every three Canadians pay extra on their mortgage. These additional payments, which amount to just 1% of the mortgage annually, result in an average interest savings of $384 over a typical 5-year term, considering the average mortgage is $258,000. However, opting for a mortgage with lower prepayment privileges but a lower interest rate might be more beneficial for most people. For instance, a reduction of just 0.1% in the interest rate could save more than three times the interest on the same mortgage amount.
2. Underestimate the importance of porting flexibility.
On average, Canadians move every five to seven years, with a typical closing period for a new home ranging from 45 to 60 days. However, many lenders offering low rates allow just 30 days or less to port your mortgage without penalty. If you’re unable to port your mortgage due to time constraints when you move, you might face a costly penalty, ranging from a minimum of three months’ interest to 3% or more of your mortgage amount. If there’s a possibility that you might move, it’s usually not wise to prioritize saving a fraction of a percentage point on the interest rate (which could amount to around $1,224 on an average mortgage) when the penalty could be one and a half to four times higher over a term of 5 years.
3. Worry too much about the risk of a variable rate.
Variable rates often outshine fixed rates in the long run, a commonly recognized truth. Additionally, they typically come with lower prepayment penalties compared to fixed-rate mortgages. What’s often overlooked is that adjustable-rate mortgages don’t necessarily mean payment uncertainty. About half of the leading lenders offer variable rates with fixed payments. This means you can enjoy the advantages of a lower initial variable rate without fretting over potential spikes that could impact your monthly budget.
Remember: increasing interest rates may temporarily slow down your mortgage payoff if you have a fixed-payment variable rate. However, when you renew your mortgage, your payment usually increases slightly to maintain your original amortization schedule.
4. Underestimate the importance of blend-and-increase options
About half of borrowers revise their mortgage terms before they reach maturity. Renegotiating early can be expensive for those wanting to boost a closed mortgage. Certain lenders may not permit increases without imposing penalties. Others might make you pay an uncompetitive interest rate on the raised loan amount or apply higher rates to your entire remaining balance! If you need to refinance or acquire a larger mortgage for a new home, ensure you choose a lender that A) offers excellent published mortgage rates and B) allows you to increase your mortgage at favorable rates without excessive fees or penalties.
5. Overlook penalty calculations
Picking a lender without factoring in prepayment penalties could be financially harmful for many. Consider this: with fixed-rate mortgages, penalties from big banks can be two to three times higher than those from non-bank lenders. Similarly, certain deep-discount lenders may charge penalties equaling 3% of the principal for variable-rate mortgages rather than the standard 3-month interest. In either case, the penalty could exceed three to four times the interest saved from a slightly lower rate. Unless it’s your final mortgage or your balance is minimal, you must be mindful of potential penalties.
6. Overlook the role of a bank
Most mortgages in Canada are funded by banks known for their trusted brands. However, they’re often not worth paying significantly more for. Besides the risk of bank penalties, loyalty to a bank rarely secures the lowest market rate due to intense competition. Moreover, bank representatives typically promote only their own mortgages and seldom inform you about better deals elsewhere. Nowadays, you can manage everything online or by phone, eliminating the need for a physical branch. Mortgage lenders can electronically accept payments (and prepayments) from any bank account you choose, making almost all lenders equally convenient. In summary, consolidating all your finances with one institution isn’t worth the added expense of a higher bank rate.
7. Overlook the significance of comparing rates
There are over 400 lenders offering mortgages in Canada. The gap between the lowest and highest 5-year fixed rates exceeds two percentage points, with a difference of over 0.35 percentage points between the lowest and average rates. Paying an additional 1/10th of a percentage point could cost you $472 more over five years for every $100,000 of your mortgage. Despite this, many people spend more time researching vacations than finding the best mortgage. Reputable rate comparison sites offer objective information about mortgage rates across the entire market, making them valuable resources. Use these sites to your advantage, even if you prefer working with a specific broker or bank. Ensure they provide competitive offers by comparing them against what you find online.
8. Worry too much about standard charge mortgages (vs. collateral charges)
Collateral charge mortgages received a bad rap after a CBC Marketplace investigation, but they’re often misunderstood. The main downside is that switching lenders could cost around $1,000, especially if you seek a lower rate when your mortgage matures. However, worrying about this $1,000 cost is minor if it’s outweighed by better rates or features from the new lender. Why stress over a $1,000 switch fee if you save $2,000 on the rate or gain access to a low-cost line of credit? It’s also worth noting that most home equity lines of credit are collateral charges. Additionally, since 4 out of 5 borrowers stick with their lender at renewal, switch fees are often less significant.
Tip: In certain cases, lenders may cover or reduce your collateral charge switch fees, making the debate about collateral versus standard mortgage irrelevant.
9. Underestimate the importance of restricted mortgages
Many lenders offer low rates but offset them with restrictive mortgage contracts. It’s becoming common to encounter lenders that limit your ability to:
- switch to another lender before the term ends
- move your mortgage within a reasonable period
- add to the mortgage before it matures
- lock your rate at a low level (if you wish to renew early or have a variable mortgage).
Other lenders impose expensive fees for ending your mortgage early.
It doesn’t make sense to pay extra for features you won’t use, but predicting our future needs isn’t always possible. Often, it’s not worth saving a fraction of a percentage point on the rate if it means being restricted by clauses that could cause problems later on.
10. Worry too much about minor differences in interest rates.
Some individuals base their choice of lender or broker on a tiny difference in interest rates, as small as 0.01 or 0.02 percentage points (which may translate to just a $1 or $2 difference in monthly payments on an average mortgage). Typically, on rate comparison websites, the top two mortgage rates are separated by less than 0.03 percentage points on average. However, the provider with the lowest rate often attracts more than twice as many customers. Considering these factors, selecting a mortgage solely is almost never wise because it offers the lowest rate. When rates are similar, it’s crucial to prioritize factors such as mortgage terms, conditions, and the quality of service or advice you receive to avoid any regrets after closing the mortgage.