In theory, finding the best interest rate should save you the most amount of money but that’s not always the case. Your ultimate goal should be to pay the least amount of interest during your term and understanding the small print will help you achieve that.  

The inevitable mortgage penalty comes into play if you decide to break your mortgage for various reasons - refinance, sale, etc. Penalties are calculated differently from lender to lender and fixed vs. variable. The range of penalty can be .75% to 6% or even 7% of your mortgage balance. If your mortgage balance is 400k, that would mean your range is $3,000 to $28,000. To be honest, the lenders are banking (pun intended) on you breaking your mortgage as 60% of Canadians do in the first 3 years. It’s my job to make sure when you do, you pay the least amount of interest.

This means, if you buy another home, it might make sense to take your current mortgage and interest rate with you instead of paying the penalty. Most lenders allow this, but some mortgage products don’t. It is essential to know if you can take your mortgage with you for the life of your term so you’re not surprised down the road.

Some no-frills mortgage products offer a lower interest rate but come with some small print. A bona-fide sales clause is one, this means you can’t break your mortgage unless you sell your property. Another one is a fixed penalty percentage, meaning you might pay 3% of your mortgage principal to break even a variable rate mortgage. These are just a couple of the things you need to be aware of. 

The majority of mortgages come with prepayment privileges. This is the ability to increase your monthly payment and/or make a lump sum payment - both will put the funds directly towards your principle which means you’re paying off your mortgage quicker. Some lenders allow you to prepay up to 25% of your original mortgage amount at any time during the year. Other lenders allow you to pre-pay up to 10% but only on the anniversary date of your contract. If you anticipate using your prepayment privileges then it would be wise to align yourself with the more flexible lender.

It’s important to know this because, at renewal time, there is typically no cost to switch lenders - aka...you are a free agent. But if your mortgage is registered as a collateral charge, you could incur costs of $1,000 to $1,200 to leave your lender. Your current lender knows you have to pay those costs so the renewal rate might not be as low as you expected.

Knowing the answers to these questions will only better prepare you and at the end of the day...save you money.