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The Best Mortgage Rate Isn’t Always the Lower Mortgage Rate

If you’re shopping for a new home or want to refinance your current mortgage, then you know about the desire to get the lowest mortgage rate available. Even a small discount can add up to hundreds or even thousands of dollars over the course of your mortgage term.

When you see advertised mortgage rates, you never see the features of the mortgage beside it. Can you port your mortgage? What’s the mortgage penalty These are all important questions that can make a seemingly cheap mortgage very expensive if you lack the features you need.

Just like with clothes, food, and cars, you get what you pay for with mortgages. A more expensive coat can is usually warmer than a cheap one, and a mortgage with a higher rate can provide additional benefits that a cheaper one doesn’t. Depending on what you need, getting a higher rate can actually cost you less in the long run because of the features it provides.

Before you sign for the cheapest mortgage you can find, be sure to talk to a mortgage broker who can find out the features you need and get you the best mortgage rate around.

 

Fixed or Variable

Fixed mortgages are the most popular type of mortgage in Canada. With a fixed mortgage, you don’t have to worry about rates going up because your payment will stay the same for the length of your term.

Variable mortgages, on the other hand, can go up or down when the bank changes their prime rate. Prime rate only changes when the Bank of Canada decides to raise or lower interest rates. The last increase was on October 24th, 2018.

Variable rates are almost always cheaper than fixed rates, but they have the potential to become more expensive if the Bank of Canada raises interest enough during your term. The difference between a variable and fixed rate is known as the “spread.” When the spread is high, it can make sense to go variable, as you’ll save a significant amount of money at the beginning of your term.

Since variable mortgages have the ability to change during their term, many people see them as risky. That certainly explains the huge disparity between the number of fixed and variable mortgages. But that’s not the whole story.

One big advantage variable mortgages have over fixed mortgages is the smaller penalties for breaking your mortgage early. The penalty for breaking a variable mortgage early is often just 3 months’ interest, but the penalty for a fixed mortgage can range from 3 months’ interest to the interest rate differential to a flat percentage of the total mortgage amount, depending on what’s written in your mortgage contract.

 

Features or No-Frills?

A no-frills mortgage is exactly what it sounds like. You may not know the difference unless you understand what the “frills” you’re giving up are.

The lowest rates are for no-frills mortgages that fall into certain down payment thresholds, and may come with other restrictions like a minimum or maximum purchase price.

One such feature missing from no-frills mortgages is the ability to port your mortgage. If you need to move homes in the middle of your term, such as moving for a new job or having a baby, you would normally have to break the mortgage, pay the penalty, and get a new mortgage – possibly at a higher rate.

When you port your mortgage, instead of breaking it, you blend it with a comparable new mortgage term. You avoid the mortgage penalties that you might have paid, and get an interest rate that’s a mix of your old rate and the current best mortgage rates.

While a mortgage that comes with the ability to port could cost a few basis points more than a no-frills mortgage, you would save thousands if you had to move suddenly.

 

The Rate Is Important, but the Features Are, Too

No-frills mortgages only seem cheaper because you can’t know how much it would cost you to break a mortgage, or the savings of porting your mortgage when you move. The only thing you can know going into a mortgage is the monthly payment.

But sometimes preparing for the worst can save you thousands of dollars and many headaches, all for the cost of a couple hundred dollars per year. When comparing mortgage rates online, be sure to talk to a mortgage broker with your best interest in mind to figure out if the lowest rate is actually the best rate.


Chris Chris 01/25/2019
Canadian personal finance buff and all-around writing enthusiast, Chris loves breaking down complicated money ideas to show that they're really not so complex. 
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