There’s a lot you need to know when you’re choosing a mortgage. When home buyers start their mortgage process, it’s easy to get overwhelmed. And when we’re in that state of overwhelm, we tend to go with what’s easiest—turning to the bank.
I’m not saying that choosing a mortgage from your bank is the wrong choice. I still work with many Big Banks and credit unions, depending on the client. But, their choices can be limited vs. working with a monoline lender.
When I’m helping clients choose a mortgage that fits their needs, there are 10 questions I ask to determine if a mortgage is the right choice.
1.What is the rate drop policy with respect to pre-approvals?
A good lender will pre-approve you at a certain rate for 120 days. If rates drop during that time frame, you can qualify for that lower rate. If the rate increases, you still have the benefit of the lower rate.
Having this rate hold option is great when we’re in times of rate fluctuations, as we are currently.
2. What factors can affect my approval?
While a lender may pre-approve you at a certain rate up to a certain purchase amount, you won’t know if you’re fully approved for a mortgage until you have a specific home in your sights.
Lenders need to know the total cost of the home—property taxes, maintenance fees, actual price, etc.—before agreeing to lend you the money.
Changes in your situation, such as your credit score or employment status, can also affect your approval status.
3. Will I be notified if a better product or rate comes available in the future?
Many lenders and bankers renew existing clients at the posted rate, rather than the discounted rate.
A mortgage broker like myself, notifies you for your mortgage’s upcoming renewal, and the best rates and products available. This gives you ample time to choose the best product for you.
4. Is the mortgage portable? Can I port my CMHC/Sagen premium? How is that calculated?
A bit of a three parter question! If you plan on moving before your mortgage term is up, you want to make sure your mortgage is portable, meaning you can take it, along with your existing interest rate, to your new home without incurring any fees.
You also want to make sure that you don’t have to pay additional CMHC/Sagen premiums if your down payment is under 20% of the total purchase price.
5. Is my broker looking out for my best interests, or are they motivated by targets, quotas or incentives designed to sell me a specific product?
This is an important question to ask any banker or mortgage broker. Each bank and brokerage is structured a bit differently when it comes to paying their people.
I’m paid by the lender once your mortgage is funded. And, I choose a mortgage lender based on your criteria and needs—not by how they pay me. For example, if you want to buy an acreage, there are only certain lenders who do that type of lending.
I want to ensure you have the best mortgage experience possible and find the best mortgage for your needs.
6. What are your prepayment privileges?
Many ‘no frills’ mortgage products come with low rates but zero prepayment privileges.
Unfortunately, the majority of homeowners don’t use their prepayment privilege. But, if you’re a commission-based employee or if you’re expecting a large sum of money in the next five years, you might want to consider the higher rate in favour of some added flexibility.
Variable rate mortgage products typically have flexible prepayment privileges that allow you to put more on the principal of your mortgage, without penalty.
7. If I choose a mortgage with a variable rate, what rate am I guaranteed if I choose to lock in to a fixed rate?
If the Bank of Canada’s prime interest rate starts to increase and you choose to lock in your variable rate mortgage, your rate isn’t frozen at its current state. You’ll be bumped to the current fixed rate.
For example, if you’re in a 2.2% variable rate mortgage and you choose the lock in, you’ll be bumped to the 5-year fixed rate, which is currently averaging 4.5%.
There’s also a significant difference between your bank’s or lender’s posted rate (the rate you see listed) vs. their discounted rate (the rate you negotiate). You want to have someone on your team (like me!) to help you negotiate this rate down.
8. Is “rate differential” based on the posted rate or the discounted rate?
When choosing a mortgage, you want to think about if you’ll want to break your term early. If you want to refinance before your term is up, you’ll typically have to pay a penalty.
This is either three months’ interest or an interest rate differential (IRD), whichever is greater. The differential is difference between the rate of your current mortgage and the new, lower rate,
In most instances, variable rate products charge only three months’ interest if you break your term early. With most fixed-rate products, they will charge the IRD.
Sometimes, banks will base the rate differential on the posted rate at the time you signed your first mortgage, and the discounted rate of the new mortgage. This makes the rate differential much larger.
9. Do you have a mortgage for self-employed or commission-based people?
Unfortunately, it can be difficult to be approved for a mortgage if you fall into these two categories. It’s a bit trickier to prove your income to a lender in these instances.
Because I have access to more lenders than your local bank, I can typically find a lender that will accommodate you, if you can adequately prove your income and if you’ve been self-employed for at least two years.
10. If I choose this mortgage, is this really the best product for me?
Choosing a mortgage is a big decision. It’s only a couple hundred thousand dollars after all!
When I work with clients, I want them to feel confident in the decision they are making with their mortgage. If there is something they don’t feel comfortable with that we can change, then we look at changing it.
A mortgage is a tool to support your financial goals. So choose the mortgage that’s going to help you reach these goals and get you into the home you want.
Reach out if you have any questions about choosing a mortgage that’s right for you!