Jan 23, 2020
3 common mortgage myths exposed
Looking to buy a home? If so, you're not alone.
According to the 2020 RE/MAX housing market outlook report, one in two Canadians plan to purchase a home in the next five years. Whether you're a first-time homebuyer or a current homeowner looking to trade up, knowing how to identify common mortgage misconceptions—and understanding the facts—can help you feel more confident as you go through the mortgage process.
As a first step in your journey, we've demystified three common mortgage myths:
Myth #1: Getting a mortgage pre-qualification is the same as getting a mortgage pre-approval
While some lenders offer both mortgage pre-qualifications and pre-approvals, it's important to know that they are not interchangeable.
When you are pre-qualified for a mortgage, you have a general idea of how much mortgage you might be approved for, but there's no certainty this is the actual amount you'll receive. When you are pre-approved, you have a much clearer picture of the home price you can look at and what you'll pay each month.
At TD, a mortgage pre-approval:
Allows you to lock in the term and interest rate for 120 days. This means your rate is protected if rates increase while you're shopping for a home; on the flip side, if interest rates go down, you can ask for an adjustment to the lower rate without completing a new application and restart your 120-day hold.
Is free of charge and with no obligation to apply for the full pre-approved amount or for a mortgage with TD.
Can help you shop for a home with more confidence knowing that you're making an informed financial decision.
Myth #2: I can make a lump sum payment toward my mortgage any time
There are benefits to making extra mortgage payments—such as reducing your amortization period (the amount of time it'll take to pay off your mortgage) and paying less interest over the course of your mortgage term. 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 open and closed mortgages, 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. Closed mortgages, on the other hand, provide the option to make lump sum payments up to 15% of the original principal amount each calendar year. If you want to prepay more than 15%, a prepayment charge may apply. An open mortgage typically has a higher interest rate than a closed mortgage for the same term because of the added flexibility.
TD's mortgages also have flexible payment features including the ability to pause your payments and options to accelerate or increase your payments (subject to conditions). You can increase your principal and interest payments by up to 100% of your regular principal and interest payment—a great option if you're looking to pay off your home faster.
If flexibility is important to you, consider choosing a mortgage that provides these features and options. Like any legal agreement, it's important to understand the terms and conditions of your mortgage and know what you can and cannot do before you sign.
Myth #3: I can change or end my mortgage at any time
Life is full of unexpected events—for example, you could be three years into a five-year mortgage term and suddenly get the job offer of your dreams in another city or country. To make the move, you may need to sell your home and end your mortgage early.
'Breaking your mortgage' can result in a financial cost. When customers pay out a mortgage that is not open to prepayment before the end of the term, the lender will usually charge what is known as a prepayment charge.
A prepayment charge for a closed mortgage that has a variable interest rate is three months of interest.
A prepayment charge for a closed mortgage that has a fixed interest rate is the higher of two amounts: three months of interest, or the interest rate differential (IRD) – the difference between the interest rate on your current mortgage term and today's interest rate (including any discount you received on your rate) for a term that is the same length as the remaining time left on your current term.
Let's look at an example. Let's imagine a customer with 24 months remaining on their mortgage term who would like to pay off the entire $100,000 balance of their mortgage. Imagine they are currently paying a non-discounted rate of 5% and the current posted rate for a 2-year fixed rate mortgage term is 4%. The calculation for three months of interest and the IRD Amount is shown below:
|Three months interest amount:||Interest Rate Differential (IRD) amount:|
|$100,000 x 5% x 3/12 months=$1,250||$100,000 x (5%-4%) x 24/12=$2,000|
Depending on how much time is left on your mortgage term, a prepayment charge can cost thousands of dollars, making it critical that you understand the terms of your mortgage before you decide to end it early. Since the IRD Amount is higher than the three months interest amount, the customer's prepayment charge will be $2,000.
There are options: if you have a fixed rate mortgage, there is an option to port (or move) your existing mortgage terms without charge. This could happen when you're buying a new house and need a larger principal amount mortgage. Your existing rate is transferred to your new mortgage with any additional funds priced at current rates. The final rate is a blended rate of the existing and new rates. These details are included in your mortgage agreement, so be sure to ask and understand what the details mean when you apply.
For more information about mortgage facts vs. fiction, speak to an advisor or mortgage specialist, or visit www.td.com to assess the kind of mortgage that is best suited for you.