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Why You Shouldn't Always Choose The Mortgage With The Lowest Interest Rate

Sean Cooper

Feb 18, 2019 4 min read

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3 Reasons You Shouldn’t Always Choose The Mortgage With The Lowest Interest Rate

Finding a mortgage is about a lot more than just finding the lowest interest rate mortgage. If you were buying a new car, would you buy the lowest priced car on the lot? I hope not. If you did, you might end up driving off in a Ford Pinto! All kidding aside, searching for the mortgage with the lowest rate while ignoring other important factors can be a case of penny wise, pound foolish.

Mortgages are becoming more complex these days. It helps to have a mortgage broker on your side to help find the mortgage that’s right for you. The lowest interest rate mortgage can help save you hundreds, but the wrong mortgage can cost you thousands.

Here are three factors to consider (besides the rate) when searching for a mortgage.

Why you shouldn’t always choose the lowest interest rate mortgage

1. Penalties: If you need to break your mortgage, consider a slightly higher rate with lower penalties.

Mortgage penalties are such an important factor, yet many of us turn a blind eye to them. Now, I know what you’re probably thinking. “I’m not going to break my mortgage, so why should penalties matter?”

While you may not have any plans to break your mortgage when you first take it out, life is always changing. You could decide to take a job promotion across the country, get sick or lose your job. Nobody has a crystal ball, but if you believe there’s a good chance that you might have to break your mortgage at some point, it’s worthwhile to consider a mortgage with a slightly higher mortgage rate and lower mortgage penalties. It’s better than turning down a dream job promotion just because your mortgage penalty is too high.

If you believe you might break your mortgage, consider signing up for a variable rate mortgage or a fixed rate mortgage with a monoline lender (a lender that deals in one line of business, mortgages). With a variable rate mortgage, you’ll typically only pay three months’ of interest, whereas, with a fixed rate mortgage with a monoline lender, the penalty is typically based on the lower discounted rate instead of the higher posted rate.

2. Prepayments: You might want a mortgage with generous prepayment privileges to pay it off quicker.

Would you like to “burn your mortgage?” Then you’ll most likely want a mortgage with generous prepayment privileges. Prepayment privileges are extra payments you can make above and beyond your regular mortgage payments without facing a hefty penalty.

The three most common prepayments include increasing your payment, doubling it up and making lump sum payments. What makes prepayments powerful is that 100 percent of your money goes towards principal. That means if you throw an extra $2,000 at your mortgage from your tax refund, your mortgage balance will go down by the full $2,000. Cool!

Also read: The top 10 mortgage mistakes commonly made by Canadians

3. Portability: Having a portable mortgage may pay off in the long run if you need to move.

If you end up taking that job promotion across the country, it helps to have a mortgage that’s portable. With a portable mortgage, if you’re planning on buying another home, you can move your mortgage without paying a stiff mortgage penalty.

For example, let’s say you’re planning to move from Toronto to Calgary to take a new job with a significant pay raise. With a portable mortgage, you can sell your home in Toronto, buy a new home in Calgary and port your mortgage to avoid the penalty.

It’s important to note that a portable mortgage isn’t necessarily a slam dunk. The lender can always say no to the port if they don’t like the property you bought. Nevertheless, a mortgage that’s portable does provide you with more options, including “blending and extending” your mortgage if you’re buying a home that’s more costly than your current place.

The bottom line

It’s important to consider all these factors when deciding on a mortgage and not just going with the lowest interest rate mortgage! Once you have evaluated your specific needs and know what you’re looking for, it will make the process much easier.

If you think you’re ready to discover your mortgage options, try the new Borrowell Mortgage Coach to find the best mortgage for you based on your unique credit profile. Start by logging into your Borrowell account or by checking your free credit score with Borrowell and clicking on mortgages under the “My Recommendations” tab.

Meet Your Mortgage Coach 

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. 

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