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What are the typical mortgage terms and conditions in Canada?

There are various aspects of buying a property, and you will need to approach each of them with as much knowledge as possible. At the first stage, you will hopefully have your Offer to Purchase accepted. You will then go through the process of having the property inspected and getting your mortgage offer. Once the mortgage has been approved, you will begin signing your mortgage agreement, which has plenty of potentially complicated terms and conditions.

It is important to understand your mortgage agreement’s terms and conditions to the best of your ability, as breaching some of these terms could turn out to be costly in the future. This article will break down some of the common variances within the mortgage agreement and what aspects you might be wise to look out for.

The important thing, to begin with, is to really read the agreement several times. Gain an understanding of exactly what you’re signing. It may be a wise decision to discuss your mortgage terms and conditions with a mortgage broker who will fully understand the ins and outs of mortgage terms. Alternatively, a real estate lawyer will also be privy to extra knowledge which will help you.

Portable or Assumable

The question to ask yourself here is the likelihood of selling your property before the mortgage term is complete. Sometimes we don’t plan to sell our properties; however, life changes, and it can come up as a surprise. Sometimes having as much flexibility here as possible is what you should aim for.

A portable mortgage will allow you to ‘port’ your mortgage to another property. Essentially what this means is if you’re selling your property to purchase another property, likely, you can move the mortgage onto the new property with your existing mortgage rate and terms. By doing this, you can avoid the risk of any early repayment penalties or fees that would normally be triggered if you broke the agreement before your mortgage term.

However, not all mortgages are portable. As a general rule, most fixed-rate mortgages are portable, but variable rate mortgages are not.

Another option is having an assumable mortgage. This can be beneficial if you are selling your home but not purchasing a new one. An assumable mortgage allows you to transfer your current mortgage with your current terms and rates to your property’s purchaser. This is a way around triggering the early repayment clause within your mortgage agreement. This can also be attractive to potential buyers, especially if you signed your mortgage agreement. You had much better rates than are currently available on the marketplace.

Prepayment Situation

As discussed, making early repayments can be quite an important factor when considering your mortgage’s terms and conditions. You may wish to discuss what the prepayment options are within your terms with your mortgage broker. Different mortgages and different lenders offer differing levels of flexibility regarding prepayments. Some will allow you to make increased monthly payments or allow lump-sum payments against your mortgage without a penalty.

As an example, if your mortgage had a 15/15 prepayment option, you would be able to increase your monthly repayments by 15% once per year and/or make a payment against the mortgage to the total of no more than 15% of your outstanding mortgage balance.

This can be beneficial if you have a large amount of excess cash in your bank account, as you will be able to pay off your mortgage sooner without facing any potential prepayment fees.

Prepayment Penalties/Fees

It is important to understand exactly what could cause the agreement to trigger a prepayment penalty. This is potentially a large fee you would have to pay if you decided to break your mortgage term early. Some common causes for breaking your terms are:

  • Refinancing your mortgage before the end of the term
  • Selling your property before the end of the time.
  • Paying off your mortgage earlier than expected

We have obviously discussed that there are potential ways around all of these options. However, it is always important to think of the consequences of any actions involving your mortgage agreement.

Generally, if you have a variable rate mortgage, the fees associated with breaking your mortgage terms would be three months’ interest. This is likely to be greater than three months’ interest if you have a fixed-rate mortgage.

Collateral vs. Non-Collateral

When signing up for your mortgage, you may have been given the option to get a collateral mortgage. This is when you can obtain further financing from your mortgage agreement, otherwise known as a re-advanceable mortgage. In simple terms, it allows you to borrow money against your home throughout your mortgage term without having to go through the process of refinancing your mortgage.

The issue here is that a collateral mortgage is not portable to other lenders. This means that if you wish to switch lenders at any point, you would need to go down the legal route to try and find a way out.

It is worth discussing your options here with a mortgage broker to fully understand which mortgage product may benefit your personal situation the most. If you want a lot of flexibility in the future, the collateral mortgage probably is not for you. However, if you’ve found your forever home, and you want the finances to make it absolutely perfect, then it may be exactly the option you’re looking for! Just remember to read your terms and conditions thoroughly and potentially consult a lawyer or broker.

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