Mortgage Features That Can Matter More Than Rate

Mortgage features that can be worth more than a lower rate

Two mortgage offers a tenth of a point apart can look like an easy choice. But the rate is only the cost of keeping the mortgage to the end of the term. If you sell, refinance, pay down a lump sum or switch lenders early, other parts of the contract decide what you pay: how the penalty is calculated, how much you can prepay, whether the mortgage can move with you, and how it is registered. This checklist walks through each one and shows how to put it in dollars next to the rate.

Check 1: How the prepayment penalty is calculated

On a closed mortgage, breaking early usually costs the higher of three months' interest or an interest rate differential (IRD). The IRD depends heavily on the comparison rate the lender uses, and many lenders build posted rates into it. Two lenders can quote similar rates and produce very different penalties.

Here is an illustration. Offer A is 4.79%; Offer B is 4.89%. Over five years on $450,000, Offer A saves $2,161 of interest. But suppose you need to sell with 36 months left. With Offer A's comparison rate of 3.29%, the simplified penalty is $20,250. With Offer B's comparison rate of 4.39%, it is $6,750.

If there is a realistic chance you will break the mortgage, the penalty method can be worth more than the rate gap. If you are confident you will stay to the end of the term, the rate matters more. Either way, ask each lender to show how it would calculate the penalty, in writing.

Worked exampleOffer A: penalty with three years left

Balance: $450,000
Contract rate: 4.79%
Comparison rate: 3.29%
Months left: 36
Three months' interest: $5,389
Simplified IRD: $20,250
Likely penalty (larger): $20,250
Method: the interest rate differential

Assumptions: Illustrative: $450,000 balance, 4.79% contract rate, 36 months left, and a 3.29% comparison rate from a method based on posted rates; simplified interest rate differential. Computed by the site's calculators.

Check 2: Prepayment privileges

Prepayment privileges are the amounts you can pay on top of your regular payments without a penalty: increased payments and lump sums, up to a set amount or a percentage of the original mortgage. They vary by lender, and they matter in two ways. They let you cut interest by paying down principal sooner, and they can reduce the balance a penalty is calculated on if you later break the mortgage.

How large a lump sum can you pay each year, and on which dates?
By how much can you increase your regular payment?
Is the limit based on the original amount or the current balance?
Does unused room carry forward to the next year?

Check 3: Portability

A portable mortgage can be moved to a new home, keeping your rate and term, rather than broken when you sell. If there is any chance you will move during the term, portability can be the difference between a penalty and no penalty.

Ask what porting involves in practice: how long you have between selling and buying, whether the new property needs approval, and how any extra borrowing would be priced. Lenders handle these differently, so get the details for the offer in front of you.

Check 4: Standard or collateral charge

A mortgage is registered on the property's title either as a standard charge or as a collateral charge, and the two work differently. Ask the lender to explain how its own product is registered and what that means for you. The practical point for comparing offers is simple: a collateral-charge mortgage can cost more to switch to another lender at renewal.

Ask which type each offer uses. If one offer is collateral and you expect to shop around at renewal, count the possible switching costs as part of its price. The renewal switch calculator can help.

Check 5: Cash back, open terms and fees

None of these shows up in the rate, which is why the checker cannot score them. It compares your rate with a published average; it doesn't know your fees, features or penalty terms.

Cash back: an up-front amount is not a lower rate. If you break the mortgage, you may have to repay it.
Open or closed: an open mortgage has no prepayment penalty. Ask what the open rate is and compare it with how likely you are to pay off or break the mortgage early.
Fees: ask about appraisal, administration and any other charges, and whether the lender will cover them.
Rate hold: get the hold period in writing. See rate holds and pre-approvals.

Pull it together in dollars

The aim is not to find a perfect mortgage but to know what you are trading. A slightly higher rate can be a fair price for flexibility; a slightly lower rate can be expensive if it comes with an exit you are likely to need.

Questions people ask

Is the lowest rate always the cheapest mortgage?

Only if you keep the mortgage to the end of the term and the other costs are equal. If you break it early, the penalty method and any cash back repayment can outweigh a small rate saving.

Where do I find the penalty and prepayment terms?

In an information box at the start of the mortgage agreement. Lenders must also tell you how they calculate the prepayment penalty, so ask them to walk you through it.

What is a collateral charge mortgage?

It is one of two ways a mortgage can be registered on your property's title, the other being a standard charge. A collateral-charge mortgage can cost more to switch to another lender, so ask which type you are being offered and how it would affect a move at renewal.

Do unused prepayment privileges carry over?

It depends on the lender's contract. Check the prepayment section in the information box at the start of your agreement, or ask your lender directly.

How does an open mortgage compare?

An open mortgage has no prepayment penalty, so you can pay it off or switch at any time. Compare its rate with the closed rate, and weigh the difference in dollars against how likely you are to need that flexibility.