1. Preapproval vs. Mortgage Contract
When a lender pre-approves you for a mortgage, it is not a guarantee that they will enter into a mortgage contract with you. A pre-approval means the lenders is interested in offering you a mortgage. A lender might choose not to offer you the mortgage after closely assessing you and/or the property.
2. Will you be able to afford the mortgage?
Consider not just how much money you have today, but your financial position for the length of the mortgage. Ask yourself if you are able to continue to make the full payments on time. Even if you can, consider how the payments will affect your spending money and your ability to deal with sudden or unexpected financial needs. Will you have difficulties making sure you have enough left for other things you need?
3. How stable is your income and employment?
This is especially important for seasonal and contract workers as well as all borrowers where a significant portion of income is variable (commission, bonus, overtime). A decrease in pay or losing your job could seriously change the affordability of the mortgage and your ability to pay the mortgage payments.
4. How much does owning a home cost?
Owning a home costs more than the amount of the mortgage. When you purchase a home, there are closing costs, including legal and other fees, property taxes, appraisal fees, and land transfer taxes. Once the home is yours, there are moving expenses, property taxes, insurance, condominium fees, home repairs, and so on. Make sure to include all of these expenses as part of the total cost when you are considering if you can afford a mortgage.
5. Will owning a home affect your other financial and life decisions?
Mortgage payments could limit your ability to manage other expenses. After making your mortgage payments, would you have enough money to pay for the things you might need in the years ahead? You might need a vehicle, wish to travel, have children, or add to your family in the future. Consider if a mortgage could prevent you from managing other commitments or goals.
6. Type of Mortgage
The most common choices are fixed rate, variable rate and home equity line of credit (HELOC). Sometimes these mortgage types are available in combinations. A fixed rate mortgage has the rate set for a specific term and the rate only changes at the end of the term. A variable rate mortgage often has a lower initial rate than a fixed rate of the same term, but the rate is subject to change based on a formula established at the outset. The formula may change at the end of the term. A line of credit provides an amount that you can borrow and you can use it when you need it. You can pay it back and use it again, similar to a credit card. Typically, payments are interesting only on the amount you have used. Credit reporting agencies sometimes treat a HELOC as consumer credit when reported. The interest rate and credit limit on a HELOC are subject to change at the discretion of the lender.
7. What happens if you can’t pay for the mortgage?
Not paying your mortgage on time and in full can lead to penalty fees, default, and even foreclosure. If you default, the lender has the right to take possession of the property to recover the money still owed on the mortgage. Depending on the circumstances, you may never get the home back and the lender may sell the home. If this happens, all of the previous mortgage payments you have already made, all the money you have invested into the home, and any equity (value beyond what is owed on the mortgage) in the home could be lost. If the lender sells the home for a price that is less than what you owe on the mortgage when it went into default, you might even have to pay the difference. It will be very difficult in the future to find a lender that will offer you another mortgage.
8. Will your property value increase or decrease?
A home is often a good asset. The value of a home fluctuates up and down. Decreases in value can result in losses of equity.
9. Total cost of the mortgage
The total cost of the mortgage depends on the terms and conditions for paying it back, such as the interest rate and the amount of time it takes to pay off the entire mortgage or “amortization period”. The total cost can be much more than the amount you are borrowing. You need to determine if the rate, amortization period, and total cost of the mortgage are right for you. Your mortgage broker or lender must provide you with an estimate of the total cost of borrowing for the term.
10. Finding payment options that work for you
You can make mortgages payments every week, every two weeks, once a month, or twice a month. Make sure that you can handle the frequency, timing, and amount of the mortgage payments. You should determine if you can afford the payments and what affect it has on the total cost of the mortgage. Having larger payments will let you pay off the mortgage faster and reduce the total cost of the mortgage. Make sure you can afford the payments, plus all of your other expenses.
11. Interest rate
The interest rate will also affect the total cost of the mortgage. Choosing a variable, fixed, or convertible rate will have an impact. Ask yourself if the interest rate is reasonable for you and if you can afford it. If the interest rate is variable, there is the risk that it might go up. Even if the rate is fixed, the interest rate can still increase when you renew the mortgage. Increasing interest rates can raise your payment amounts and can make the total cost of the mortgage much higher in the long run. What is the impact on your finances if interest rates increase?
12. Understand fees and penalties
Not all mortgages are the same. There are often fees and chargeable penalties included in a mortgage contract. Be sure to understand not only which fees and penalties may apply and when, but also how the lender calculates the fees. Lenders must provide you with information on fees and penalties. There may be fees for making changes to mortgage payments, tax accounts or switching bank accounts.
13. Pre-payment Penalty
A pre-payment is the process of paying more than the scheduled payment amount or pay off the entire mortgage ahead of schedule. Pre-payments can help you pay your mortgage back faster, but most mortgages have rules and restrictions. Some don’t allow pre-payments at all. Depending on the mortgage, pre-payments can come with costly penalties. Make sure you understand the prepayment privileges, rules, administrative fees, and penalties included in your mortgage. Determine whether they are suitable for you.
14. Pre-payment Privileges
Many mortgages allow some form of pre-payment without penalty. This could be a lump sum up to an annual maximum amount and/or increase in monthly payments. Check that these privileges meet your goals.
15. Portable Mortgages
Most mortgages allow homeowners to keep the same mortgage contract and transfer it to a new home if they move. This is mortgage portability. If your mortgage does not have a portability feature, your lender could charge a fee/prepayment penalty if you want your mortgage transferred to a new property. Ensure that you understand the timing of when you can move your mortgage. Typically, lenders will re-qualify you and the new property.
16. Due on Sale
Changing the ownership of the property without the prior permission of the lender may result in paying the mortgage in full. Due on sale may occur when there is a request to change payments from a bank account that does not belong to the borrower. It might also occur when there is a request for someone to assume the mortgage without qualifying. The enforcement of Due on Sale may mean the lender is not entitled to collect a prepayment penalty. Check with your broker for your particular mortgage.
17. Mortgage Assumption
Most mortgages allow homeowners to sell their property by allowing the purchaser to take over their mortgage contract. This a mortgage assumption. If your mortgage does not have an assumable feature, your lender could charge a fee/prepayment penalty if you sell your property and do not transfer your existing mortgage contract to another property. Typically, lenders want to qualify the purchaser and if there is default insurance, it may require the approval of the default insurer. You should understand that if the seller allows the purchaser to assume the mortgage, without a letter of release from the lender, and default insurer (if there is default insurance), you could remain liable for the debt. Consult your solicitor prior to accepting an offer that includes the purchaser assuming your mortgage.
18. Prepayment on Sale Only
You cannot pay some mortgages in full until the end of the term. The only exception would be if you sold your house and there would likely be a prepayment penalty. This most often applies to very low rate mortgages. Your broker will tell you if this applies to your mortgage.
19. Change in Use
Your mortgage might include a restriction on how you may use the property. There can be penalties or the restriction may not allow you to change how the property is used (e.g., changing your property from a residence to a place of business or a rental property). A penalty may include the lender’s right to foreclose when there is a change of use.
Review the mortgage agreement as it may include additional services that usually come at a cost. It is possible that you will not want all of them. Find out what the costs are, if some of the services are optional, and if you can cancel the ones you don’t want.
21. Late Payment Penalties
Your lender may charge you fees and penalties if you are late making a mortgage payment. Your lender can pay overdue property taxes, property insurance, and condominium fees and may charge fees for doing that. When these fees and penalties apply and the amount charged depends on the lender. You should understand both the triggers and the amount of the penalties. If you have a history of these types of delinquencies, your lender may not want to renew the mortgage at the end of the term. It is always best to make your payments on time and in full.
22. Standard Charge or Collateral Charge Registration
The type of registered mortgage document varies by lender and mortgage type. A standard charge contains the specific mortgage terms such as the amount, interest rate, and payment. The specific terms of a collateral charge are contained in a separate document that is not registered. The registered collateral charge document can secure any number of present and future borrowings such as different mortgage options, line of credit, and credit cards. You can easily switch a standard charge to another lender with little or no cost at maturity, but you will incur legal fees if you want to refinance with the same lender. Lenders often register a collateral charge for a higher amount that what you actually borrow so you can refinance with the same lender without incurring legal fees. You can usually register a second mortgage if needed behind a standard charge but not behind a collateral charge. You need to consider the likelihood of needing to switch lenders when deciding between these two types of registration.