The truth behind three common mortgage myths

The ongoing COVID-19 public health emergency has created financial challenges for many Canadians, including those who may be finding it difficult to make their mortgage payments.

To help Canadians who require financial relief, TD is working with customers on a case-by-case basis to provide personalized advice and support, including mortgage payment deferrals and other financial relief options. To learn more about the TD Helps Financial Relief Programs, visit td.com/covid19.

Whether customers have experienced unexpected financial upheaval as a result of the COVID-19 pandemic or are looking to make changes to their mortgage, it's important to understand what you can and can't change, according to your mortgage agreement.

Below are three common mortgage myths demystified:

Myth #1: I can alter or end my mortgage at any time

Life is full of unexpected events – the current pandemic being just one example – which has led some Canadians to contemplate leaving their current home and ending their mortgage agreement early.

It's important to know that 'breaking your mortgage' can result in a (potentially significant) financial cost. When customers pay out a mortgage that is not open to prepayment before the end of the term (usually five years), the lender will usually levy a prepayment charge. Here is how it works at TD.

A prepayment charge for a closed mortgage with a variable interest rate is calculated as three months of interest. We calculate the interest you would owe over 90 days on the amount being prepaid, using your annual interest rate. The result is the three months of interest amount that you will have to pay.

The prepayment charge for a closed mortgage with a fixed interest rate is the higher of two amounts:

  1. Three months interest amount, OR
     
  2. The Interest Rate Differential, aka the IRD, which is the difference between the principal amount you owe at the time of the prepayment and the principal amount you would owe using a similar mortgage rate. The similar mortgage rate is the posted interest rate for a similar mortgage, minus any rate discount you received. To calculate your estimated IRD, please consult the TD Mortgage Prepayment Calculator.

Depending on how much time is left on your mortgage term, a prepayment charge can cost several thousands of dollars, making it critical that you understand the terms of your mortgage before you decide to pay it out.

Customers have options. If you have a fixed rate mortgage, and you're moving to a new home, you may be able to port (or move) your existing mortgage terms without charge to the new mortgage. This may make sense if you're buying a new house with the same or larger principal amount mortgage. If you need additional funds, your existing rate and term are transferred to your new mortgage for the existing principal amount, with any additional funds priced at current rates for the term closest to your remaining term. The final rate is a blended rate of the existing and new rates.

For more information regarding prepayment charges and to discuss your specific mortgage, please speak to a TD mortgage specialist either at your local branch or by calling 1-800-722-3098.

Myth #2: I can make a lump sum payment toward my mortgage at any time

If you find yourself with additional funds (for example by continuing to work throughout COVID-19 while reducing your spending), you may want to use that extra money to make a lump sum payment towards your mortgage.

There are benefits to making extra mortgage payments — which include reducing your amortization period (the amount of time it'll take to pay off your mortgage) and paying less interest over the amortization period of your mortgage.

But not all mortgages are created equal, so it's important to understand what your mortgage may or may not allow you to do.

For example, TD offers both mortgages that are open or closed to prepayment, with the benefits of each reflecting different customer needs.

Open mortgages are best suited for customers who want the flexibility to prepay any amount of their outstanding balance at any time without worrying about prepayment charges. An open mortgage typically has a higher interest rate than a closed mortgage for the same term because of this added flexibility. 

Closed mortgages, on the other hand, provide the option to make lump sum payments of up to 15% of the original principal amount each calendar year. If you want to prepay more than 15%, a prepayment charge may apply.

In addition to making lump sum payments, you can also speed up or slow down your payment frequency. If you increase your payment frequency from monthly to rapid weekly or even bi-weekly, over time, these more frequent principal and interest payments will mean you are paying your mortgage off faster. You can also increase your principal and interest payments once per calendar year by up to 100% of your regular principal and interest payment.

Myth #3: Mortgage renewals and refinancing are the same thing

It's important to be familiar with your mortgage term and anticipate when it'll be coming to an end so you can decide what you want to do next. Two popular options are to renew or refinance your mortgage, but it's important to understand the two are not the same.

Renewing your mortgage loan is fairly straightforward. If your term ends and your mortgage loan is not fully paid off, you may be offered a renewal from your current lender. If you want to renew, you and your lender will agree to a new term and interest rate for the remaining amount.

Things to consider when renewing are:

  • The type of mortgage loan you want: closed vs. open, fixed vs. variable interest rate
  • The amount and frequency of your principal and interest payments

Refinancing usually means renegotiating your existing mortgage loan agreement, usually to increase the principal amount by accessing the available equity in your home, or to consolidate other debts and possibly lowering other borrowing costs by taking advantage of a lower interest rate. During the refinancing process, you and your lender agree on a new amount, term, interest rate, and amortization period.

Another important difference between renewals and refinancing is that, unlike renewals, in order to qualify for refinancing, the customer must complete an application and qualify for the refinancing.

A few other things you and your mortgage advisor will discuss as part of this process include:

  • Before maturity: If you want to refinance before your mortgage loan matures, the process becomes a little more involved and you will need to consider prepayment costs.
  • How much can you borrow: When you’re refinancing to a new mortgage, you can only borrow up to 80% of the current market value of your home.
  • Your costs: In addition to possibly paying for a property valuation, you may have to pay legal fees for registering a charge against your property. You may also have to pay a discharge fee.
  • Don’t rush the process. Make sure you look at the various offerings – for both renewing and refinancing – from your lender and re-evaluate your current financial position and goals to determine what is right for your situation.
  • And when you're ready, be sure to connect with a TD mortgage specialist to discuss if refinancing is right for you.

Like any legal agreement, it's important to understand the terms and conditions of your mortgage before you make any changes, such as selling your home or discharging your mortgage. For more information about mortgage facts vs. fiction, and to clarify details of your specific mortgage agreement, speak to an advisor or mortgage specialist.