Before you sign your mortgage, Sami El-Farram suggests that you catch up on your reading.
"You really need to look at the fine print, and you should have a checklist of what you need to read," says Mr. El-Farram, a mortgage broker at Total Mortgage Source 360 in St. Catharines, Ont.
By "read," Mr. El-Farram means that it's important not just to stare at the words – you ought to understand what you're getting into. The fine print can affect everything – what you're qualified to borrow, what you owe and what might happen if your circumstances change.
"The most important areas to review are the potential penalties [for breaking a mortgage] and how the mortgage is registered," Mr. El-Farram says.
Depending on the way the document is worded, "a normal mortgage penalty of what used to be three months' interest can skyrocket to tens of thousands of dollars."
Likewise, the "collateral charge" – what the bank says the property is worth – can make a difference. In hot, ever-rising housing markets like Southern Ontario and British Columbia's Lower Mainland, "some banks are registering properties at anywhere from 110 to 125 per cent of the purchase price," betting that the property's value will keep rising fast.
"This can limit your ability to transfer, move or shop a mortgage without additional costs," Mr. El-Farrah says.
"It's important to go through all of the details to make sure that you know what you're getting into – before you sign. Your mortgage is potentially a long-term relationship that can be very expensive to end early," says James Robinson, mortgage broker and owner at Dominion Lending Centres Mortgage Watch in Toronto.
Here are some of the other items to include on your mortgage-reading checklist.
Conditions of approval
When a lender says you can get a mortgage, you'll typically have conditions to meet. You might have to prove your income and whether you actually have the down payment, or the lender might require that the property be appraised. Do you understand these conditions? Can you meet them? Some of these conditions might cost you money, such as an appraisal, so you should know what extra costs might be involved well before your closing.
Mortgages often allow you to make lump sum payments every year and increase your instalment payments. How much can you contribute and how often can you increase? These options can make a huge difference toward paying off a mortgage sooner than the 25 or 30 years on which the regular payments are based. Every increase in instalments and every lump sum can reduce the principal – the fine print will tell you what you can do without penalty. You should also check to see what the penalties might be for early payout of your mortgage.
If you take a variable-rate mortgage, chances are the fine print lets you convert it mid-term into a fixed-rate mortgage. This can protect you if rates start to rise, but you need to know what the conversion terms are. "Some lenders will tell you that they will convert into their 'best customer rate' while others simply say you can convert and don't specify what rate you'll get," Mr. Robinson says. "The lenders that guarantee their best customer rate are going to be the better choice."
Choice of lawyer
When you purchase a home, or any real estate, you'll hire a lawyer (solicitor). It's standard but important professional work; solicitors' fees are usually pretty competitive with each other, so shop for someone who gives you confidence. The lawyer's job is partly to go over the mortgage fine print the same way you should, and they'll also make sure you have a proper title to the house. The solicitor will also often act on behalf of the lender to prepare the mortgage documents and register the mortgage on title – you pay to register it. Every lender has a list of approved solicitors and it's good to check.
It's rare, but there may be a few lawyers who are unacceptable to the lender, and you'd have to shop for a new one at the last minute.
"I ask people how long they want to live in the home they're buying," says Mr. El-Farrah. If you're planning on staying forever, the fine print here doesn't matter as much. But if your purchase is a starter home or you expect to move around, you'll want to be able to "port" your mortgage – end the current one and then immediately assume a new one from the lender without any discharge penalty for ending the first one. Buyers sometimes run into trouble when they sell a home and get rid of their mortgage and then wait a few months before buying a new one – they end up penalized for collapsing the initial mortgage.