Q. Why is the rate of interest on the mortgage disclosure papers higher than the one I saw advertised?
A. The rates you see advertised are nominal rates. They do not take into consideration the effect of any of the other costs you have to pay to get a mortgage. These other costs include legal fees, appraisal fees, default insurance premiums, registration fees or other costs. The actual rate of interest, usually called the annual percentage rate (APR) does. This rate of interest is usually anywhere from one third to one half a percent higher than the advertised rate. By law in British Columbia, you must receive a disclosure statement which specifies what the APR is on your mortgage no later than 48 hours before you make a binding commitment to take out a mortgage. Ask us about this.
Q.Which is better for me: a variable rate or a fixed rate mortgage?
A. The short answer is that what’s better depends on your financial personality. If you do not follow the ups and downs of interest rates and want a guaranteed no hassle approach to paying off your mortgage, you should choose a fixed rate option. You will know how much you are paying, how much is going to pay off the interest and principal portions of your loan for the term of your mortgage. You will pay more than you would on a variable rate mortgage, but you will be able to sleep because if the rates do start to climb, they won’t affect you until the term ends and you have to renegotiate your mortgage.
If you are a bit of a gambler and follow the interest rates closely, then the variable rate mortgage is the one for you. You can get considerable savings in interest payments, but you must watch interest rates carefully. You should ensure that you have a lock in provision so that you can convert to a fixed rate if you see the interest rate start to climb. One word of caution: make sure you understand what fees the lender will charge if you decide to lock in your rates. You could end up with a locked in rate higher than one on a fixed rate mortgage.
Q. What about mortgage insurance?
A. If you do not have a down payment of at least 20%, you must buy mortgage default insurance if you are applying for a standard mortgage from a conventional lender. You have no choice.
On everything else, it is primarily your choice. Here is what is available.
- Title Insurance: This protects the purchaser from any defects in the title that were unknown and could not be known at the time of buying a property. And it will also protect you if you are the victim of mortgage fraud. There are two kinds: lender and borrower title insurance. Some lenders will require you to buy title insurance; many don’t. Whether you buy a policy for yourself is up to you. You pay only once for this policy and it remains in force as long as you own the property for which you bought it. There are several companies in Canada that offer this form of protection. Go here for more details.
- Mortgage Life Insurance: This type of insurance comes into effect should you the borrower die. If this happens, the policy pays off the entire outstanding balance on the mortgage and so your heirs have a property mortgage-free. Many conventional lenders offer some form of this policy. Look at the costs and see if you think it is worth it.
- Creditor Insurance: This form of insurance takes over if for some reason, such as loss of job or catastrophic illness or physical disaster makes it impossible for you to make mortgage payments. The insurer will make a set number of mortgage payments for you (usually the maximum number is 24) until you can get back on your feet again.
- Because we are not licensed to sell insurance, we cannot make your decisions for you. We can, however, put you in touch with insurance agents who will be happy to go over all the details so that you can decide what you want to do.
Q. What if I want/need to sell and move before the mortgage term is up?
A. If you have what’s called an open mortgage, then you would simply pay out what you owe together with the accumulated interest and any fees to discharge the mortgage. If you want the option of an open mortgage, make sure you ask for it when you apply.
If you have what is called a closed mortgage, you will have more issues to deal with. Technically you are stuck. If, however, you do have to sell your property, the central issue you will face will be the amount of the penalty you will have to pay to get rid of the mortgage. The term for this process is called the Interest Rate Differential. The procedure for calculating this amount is as follows. First, the lender determines the amount owed for three months’ interest based on the outstanding mortgage balance. Then the lender takes the difference between the rate on your mortgage and the current rate charged at the time you want to pay out and calculates the interest owing on the outstanding mortgage balance to the end of the specified term, multiplied by the interest rate you are currently paying. Whichever amount is the greater is the amount that you will pay. You will also of course have to pay the legal fees and any other fees required to discharge your mortgage.