Terms and conditions
The features and fine print that affect your total cost of borrowing.
TL;DR: there are many factors besides the interest rate that will affect how much your mortgage costs you. The terms and conditions will outline things like your penalty clause, whether your mortgage is portable, and what prepayment options you have.
It is important to carefully consider what these terms are because they could end up costing you more down the road. While getting the best mortgage rate is usually high on the list for home buyers, there are other common sections of a mortgage agreement that need close attention:
Can I break the mortgage if I need to?
While it might not seem like a big deal, it is important to have a mortgage that allows you to break the mortgage for any reason of your choosing. Some mortgage products only allow you to break the mortgage if you are selling the property to a true outside buyer, or if you refinance the mortgage with the same lender (in which case they have no reason to offer you a good rate). This is called a bone fide sale clause and means the mortgage cannot be exited under any circumstances other than an outright sale of the property to a legitimate third party buyer who is completely unrelated to you or your affairs. This clause may prevent you from making other changes you may need to make, or prevent you from taking advantage of an attractive interest rate or useful mortgage product. On the other hand, this clause comes along with a lower rate.
Is the mortgage portable?
This feature can come in handy if you find yourself having to sell your home before your term is finished, and you plan to purchase another home. A portable mortgage is one that you can take with you to a new home. In this case, you will keep your mortgage rate and terms. The benefit is that you avoid the cost of a prepayment penalty, which is a fee charged for breaking your mortgage early.
What prepayment options do I have?
Almost every mortgage has prepayment options, but some do not. This feature is what allows you get ahead on paying down your mortgage without paying fees.
Typically the prepayment options are referred to as 10/10, 15/15, or 20/20.
It is important to understand what these numbers mean. A 15/15 prepayment option means the borrower can increase a mortgage payment by 15 percent of the base amount, and/or make extra one-off payments any time, and the two put together must not be more than 15 percent of the original mortgage each year.
What are the prepayment penalties?
A prepayment penalty is money that you are charged if you break your mortgage term early. There are various reasons that home buyers find they need to break the term including refinancing, selling the home or paying the mortgage early.
For those borrowers who have taken out a variable rate mortgage, a prepayment penalty is three months’ interest. For those with a fixed rate mortgage, the prepayment penalty with either be three months’ interest or the interest rate differential, depending on which is more.