Beyond Rate: Factors in the Cost of a Mortgage

The cost of a mortgage is about more than rate, here are 4 things to look out for

As consumers, we are all looking to minimize the cost of our mortgage. Less money paid to the mortgage company means more money in our pockets to spend on any of the many costs of life. In hoping to reduce the cost of a mortgage, most people ask their broker/banker “what is your best interest rate?” Beyond rate, there are several elements that can factor into the cost of a mortgage. Over the course of this article we hope to introduce you to some key factors that can have a dramatic impact on the cost of your mortgage.

Two mortgages with the same rate might not carry the same cost over the life of your mortgage. In some cases, a mortgage with a lower interest rate may not even be the cheaper option overall. When it comes to the cost of a mortgage, here are 4 things to look out for:

1. Compounding:

Wikipedia defines compounding interest as “the interest added to the principal of a deposit or loan so that the added interest also earns interest from then on. This addition of interest to the principal is called compounding.” Most mortgages in Canada compound semi-annually, however, there are a select few mortgage products in the market today that compound monthly. A mortgage compounding monthly vs semi-annually can have the same impact as a 0.07% increase in your interest rate. Before agreeing to taking a mortgage, be sure to clarify how your mortgage will be compounding.

2. Payout Penalties:

Payout Penalties are fees charged by mortgage lenders for breaking the terms of the mortgage you chose at the time of arranging your mortgage. For example, if you took a 5 year fixed rate mortgage, and after 3 years you decide to pay off your mortgage, the mortgage lender will charge you a penalty for breaking your term earlier than initially agreed upon. Penalties can range anywhere from 3 month’s interest, to 3% of the mortgage balance, to varying Interest Rate Differentials. It is incredibly important to know the cost of paying off a mortgage prior to its maturity, as well as knowing when penalties apply, because while the average Canadian Homeowner takes out a 5 year fixed rate term, the average Canadian Homeowner also switches homes every 3 years.

3. Collateral Charge Mortgages vs Standard Charge Mortgages:

At the time of renewal, Standard Charge Mortgages offer the ability for the homeowner to go out into the market and shop for the best mortgage rate they can find, and if they choose to, ‘switch’ to a new lender without the use of a lawyer. However, Collateral Charge Mortgages require the use of a lawyer when attempting to ‘switch’ from one lender to another, which can add anywhere from $600-$2,000 to the cost of ‘moving mortgages.’ Knowing this, mortgage lenders offering Collateral Charge Mortgages would offer rates at the time of renewal that reflect this reality. Make sure that you know whether your mortgage is going to be a Standard Charge Mortgage or a Collateral Charge Mortgage

4. Prepayment Privileges:

Many prospective, and existing homeowners are aware that making extra payments on their mortgage will save them money over the life of their mortgage. Changing a payment schedule from monthly to bi-weekly can save a homeowner as much as 7 years in mortgage payments, and rounding up payments can have a similarly dramatic effect on a mortgage, as discussed here. Not all mortgages allow for extra payments, changes to payment schedules, or periodic payments. Ask your broker/banker what the mortgage payment, and prepayment options are that come with your mortgage, and build a plan to save yourself money.

For more information regarding mortgages, and the cost of a mortgage, contact the mortgage brokers at Alberta Mortgage.