When comparing mortgage options, it is natural to focus on the interest rate first.
A lower rate can certainly matter. But it is only one part of the mortgage contract.
For Ontario homeowners who may move, sell, refinance, switch lenders, or make extra payments before the end of the term, the flexibility built into the mortgage can also affect the overall cost.
That is why it is useful to compare not only the rate, but also the prepayment penalty, portability, prepayment privileges, and your likely plans during the mortgage term.
A lower mortgage rate is not the whole picture
Two mortgage products can have different rates and different contract terms.
The option with the lower rate may look less expensive at first. However, if your plans change and you need to break the mortgage early, refinance, transfer the mortgage, or make larger additional payments, other costs may become important.
The Financial Consumer Agency of Canada notes that lenders may charge a prepayment penalty when a borrower exceeds permitted prepayments, breaks the mortgage contract, transfers the mortgage to another lender before the end of the term, or repays the mortgage early, including in some situations where the home is sold.
The key question therefore is not simply:
“Which mortgage has the lowest rate?”
It is also:
“Which mortgage structure fits what I may need to do over the next few years?”
1. Understand the prepayment penalty
A prepayment penalty, also called a prepayment charge, may apply when you repay more than your mortgage contract allows or end the mortgage before the term expires.
This can matter if you:
- sell your property before maturity
- refinance during the term
- transfer the mortgage to another lender
- pay off the mortgage early
- make payments above the permitted prepayment amount
The calculation method can vary by lender and mortgage product, so it is important to review the actual contract rather than assume that every lender calculates the charge in the same way.
For federally regulated financial institutions, key information about prepayment privileges and charges must be disclosed in the mortgage agreement.
2. Check whether the mortgage is portable
A portable mortgage may allow you to transfer your existing mortgage, including certain existing terms and conditions, to another property when you move.
This can be useful if you expect there is a reasonable possibility that you may sell your current home and purchase another property before your mortgage term ends.
However, portability is not automatic.
The exact rules may depend on the lender and mortgage product, including timing requirements, the new property, the new mortgage amount, and whether additional qualification is required.
The Financial Consumer Agency of Canada specifically recommends asking whether a mortgage can be ported when purchasing a new home, because portability may help avoid breaking the existing mortgage contract in some circumstances.
3. Compare prepayment privileges
Prepayment privileges determine how much additional principal you may repay above your regular mortgage payments without triggering a prepayment charge.
Depending on the mortgage contract, this could include:
- increasing your regular mortgage payment
- making lump-sum payments
- making additional principal payments within a stated annual limit
These privileges vary by lender and mortgage contract.
If paying down your mortgage faster is part of your financial plan, a product with stronger prepayment privileges may be more useful to you than one that offers slightly less flexibility.
The important point is to check the actual contract terms, including when additional payments can be made, any minimum or maximum amounts, and whether unused privileges can be carried forward.
4. Think about your plans during the mortgage term
Mortgage terms can last several years, and circumstances can change.
Before choosing a product, consider whether there is a reasonable possibility that you may:
- move to another home
- sell the property
- refinance to access equity
- consolidate debt
- receive funds that you would like to apply toward the mortgage
- change your borrowing structure
No one can predict every change in advance. But thinking through realistic possibilities can help you decide how much flexibility is worth to you.
For someone who is confident they will keep the mortgage unchanged for the full term, one set of mortgage features may be appropriate.
For someone whose plans may change, portability and prepayment terms may deserve more weight in the comparison.
Rate vs flexibility: what should you compare?
Instead of looking at the interest rate alone, compare the mortgage as a complete package.
Important questions may include:
- What is the interest rate?
- What happens if I need to break the mortgage early?
- How is the prepayment charge determined?
- What prepayment privileges are included?
- Can I increase my regular payments?
- Can I make lump-sum payments?
- Is the mortgage portable?
- What conditions apply if I move?
- Are there other fees associated with changing or discharging the mortgage?
- How likely is it that my housing or financial plans will change before maturity?
This does not mean that a lower rate is unimportant.
It means the rate should be considered together with the contract terms and the potential total cost.
The lowest rate may not always produce the lowest overall cost
A difference in rate can affect your mortgage payments and interest cost.
At the same time, a significant prepayment charge or restrictive contract term can materially affect the economics of a mortgage if you need to change the financing before maturity.
That is why comparing mortgages should involve more than simply asking which lender is offering the lowest rate today.
A more useful comparison is:
Rate + flexibility + potential costs + your expected plans.
Before signing a mortgage contract
Read the mortgage commitment and contract carefully.
In particular, ask questions about:
- Prepayment penalties
- Prepayment privileges
- Portability
- Discharge or other applicable fees
- What happens if you refinance or sell before maturity
For federally regulated financial institutions, consumers have specific rights to receive information regarding mortgage prepayment privileges and charges.
Key takeaway
The mortgage with the lowest advertised rate is not automatically the mortgage with the lowest overall cost for every borrower.
Your mortgage should be evaluated in the context of your income, property, qualification, future plans, prepayment needs, and the actual terms of the contract.
If there is a reasonable chance your plans may change before the mortgage matures, flexibility can be an important part of the decision.
A mortgage review can help compare the numbers and the contract terms before you commit.
Chi-Ying Lui (Tammy)
Mortgage Agent Level 2
Dominion Lending Centres Rolima Financial Group
FSRA Brokerage Licence #13216
Each Office Independently Owned & Operated
mortgagesbytammylui.ca
Mortgage options, rates, terms and qualification requirements vary by lender and borrower circumstances and may change without notice. Subject to lender approval and applicable terms and conditions.