Beyond Interest Rates: Hidden Mortgage Loan Features and Their Impact on You

You know about fixed versus variable interest rates but what about the rest of the terms of your mortgage loan? These often-overlooked details can help or hinder your financial flexibility, especially when considering options for secondary financing, like a Home Equity Sharing Agreement (“HESA”, rhymes with ‘visa’) from Clay Financial. While we’re not a mortgage lender or a mortgage broker (and you should consult one for personalized advice on mortgage loans), we work with many homeowners interested in a HESA who have a mortgage. In fact, about half of our HESAs are on properties with existing mortgages. Through these conversations, we’ve seen firsthand how the wide variety of different mortgage terms can impact a homeowner’s ability to access a HESA. In this post, we’re sharing insights based on that experience.

This post is not intended to provide advice about mortgage loan terms or features, generally or in any specific situation, and is provided for informational purposes only. Clay Financial encourages all homeowners to seek personalized advice from mortgage brokers and other mortgage professionals in connection with the terms and features of mortgage loans generally and their own mortgage loan specifically and from other appropriate financial professionals in connection with other home financing alternatives.

Recapping the most familiar mortgage loan features

In this section, we provide a quick recap of some of the most familiar mortgage loan features before we dive into the hidden features of some mortgage loans in the next section.

Fixed and Variable Rate

The cost of your mortgage loan is based on an interest rate. With a fixed rate, your interest rate is locked for the term of your loan, offering predictable payments. With a variable rate, your interest rate fluctuates, typically with the lender’s prime rate, which is set by your lender in response to the Bank of Canada’s policy rate.

Term and Amortization

A mortgage loan’s term and amortization period both refer to lengths of time but are different aspects of your repayment journey. The term is the length of your loan agreement, typically between 1 and 10 years in Canada. The balance of your loan is due at the end of the term, meaning you must pay it back or, more likely, renew or refinance your mortgage loan. The amortization period, on the other hand, represents the total length of time required to pay off your loan, often 20-30 years in Canada. While a longer amortization period will lower your monthly payment, it will result in paying more interest over the life of the loan. Conversely, a shorter amortization will increase your monthly payment but decrease the total interest paid.

Open and Closed Mortgages

An open mortgage gives you flexibility to repay some or all of the loan balance early without penalty but usually carries a higher interest rate. Conversely, a closed mortgage loan will often have a lower interest rate but gives you limited prepayment privileges.

Does Your Mortgage Have Hidden Features?

Conditions on future financing: Do you need consent?

If you want to take out secondary financing on your home, you’ll be required to grant a new charge on your property. This charge secures your obligation under the financing arrangement. There are two types of charges: standard charges that secure traditional mortgage loans and collateral charges that can secure debts like home equity lines of credit and reverse mortgage loans as well as other types of contracts like personal guarantees and HESAs. We refer to all of them generally as ‘charges’ here. Charges are encumbrances on title to your property and some mortgage loans have restrictions on them.

Terms regarding your ability to grant subsequent charges (i.e., subsequent to the charge in favour of your mortgage lender) vary greatly across lenders, ranging from none to full prohibition. Understanding how your existing mortgage deals with additional secured financing is crucial, as it determines whether and how you can access new funds while complying with your existing mortgage loan agreement. We generally see terms about subsequent charges fall into one of four categories:

• No restriction: Your mortgage documents may not mention further charges or other encumbrances at all, meaning it does not place any restrictions on it.
• Notice required: You may be required to inform your lender if you grant another charge on your property but their consent is not required to do so.
• Consent required: Your lender must consent to you granting any further charges on your property and doing so without their consent could be a breach of your existing mortgage documents.
• Prohibition: Your mortgage documents may explicitly forbid granting any further charges on your property, making it difficult to access any additional secured financing.

A HESA from Clay Financial can go behind an existing mortgage, enabling homeowners to create their own custom capital stack of home financing. Our HESA is secured with a collateral charge, which is subordinate to any existing charges on title. Of course you may need an existing lender’s consent to grant that charge, so it’s important to review your existing mortgage documents to understand any restrictions.

Prepayment privileges and penalties

Many secured lenders allow homeowners to prepay a certain amount each year without penalty. However, if you exceed that limit, you may face a prepayment penalty, which could make paying down your mortgage balance early more expensive than expected.¹

For homeowners looking to use some or all of the funds from a HESA to repay a mortgage loan, it can be helpful to consult with a financial planner to understand the full cost of repayment, as you’ll need to repay the principal amount owed and pay any prepayment penalties that apply. It’s important to weigh the costs and benefits of doing so based on the full cost of repayment, not just the balance owing today.

Skip-a-payment

Sometimes life throws unexpected challenges and homeowners need time to figure out longer-term solutions. Some mortgages have features baked into them that allow homeowners to skip a monthly payment. This option can provide temporary relief, buying homeowners time to arrange a long-term solution. Usually these mortgages allow you to skip a payment once per year if your loan is in good standing. Skipped interest is added to your balance owing.

When homeowners face unexpected life events like job loss, new care expenses and urgent home maintenance issues, the ability to skip a month’s mortgage payment can be a helpful lifeline. This temporary reprieve allows time to explore more sustainable options, like a HESA from Clay Financial. A HESA provides access to home equity without adding to monthly debt obligations, making it a valuable tool for long-term financial stability, especially when navigating life’s unpredictable moments.

Portability

A portable mortgage allows you to transfer your existing mortgage loan to a new home, subject to the conditions set out in your mortgage documents. This option is beneficial for retaining favourable terms or avoiding prepayment penalties when moving.

Assumability

An assumable mortgage allows a homebuyer to take over your mortgage. It’s a bit like selling your home together with your mortgage. This option is usually only available on some fixed-rate mortgage loans. An assumable mortgage loan may allow the homebuyer to secure a lower interest rate and helps the seller avoid prepayment penalties. It may also help the seller differentiate their home in a slower market.

Interest-only periods

Some mortgages even allow you to switch to making interest-only payments on some or all of your loan balance for a period of time. Doing so can lower your monthly payment, though you may pay more in interest over the life of the loan by delaying the repayment of principal.

Know your mortgage terms to understand your options

Navigating the world of mortgages goes far beyond just interest rates – the fine print truly matters. From restrictions on future financing to prepayment penalties and even the option to skip a payment, these features can significantly impact your financial flexibility and ability to explore options like a Home Equity Sharing Agreement. So, take a close look at your mortgage documents, have a chat with a mortgage professional and make sure you’re fully aware of all the ins and outs before making any big decisions.