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Need a mortgage? Know what you are getting into…

It’s that time of year again when members are posted to the same or another province, that time of year when we sell one home to buy another, that time of year when many of us realize that very low mortgage rate we obtained two years ago might not have been such a good deal after all…

Most mortgages come with a fixed rate and a fixed term. But if you opted for a mortgage with a 5-year term and are transferred to another province two years down the road, what will happen?

On of two things will happen:

A) your mortgage will be closed with three years remaining on its term and you will have to pay a hefty penalty, and you will have to obtain a new mortgage for your new home and pay all the fees that come with that.

B) You will be able to port your original mortgage to another property… if there was a portability clause in your original mortgage contract.

The portability clause allows you to transfer the balance of your mortgage to another property, with the same financial institution, at the same rate and for the same remaining period. For example, if you had a $200,000 mortgage at 3.2 per cent with a 5-year-term, then sold your house after two years and bought another one, you might be able to port the remainder of your mortgage to the new property at the same 3.2 per cent rate – even if the rates have since increased – for the remaining three years of the term, thereby avoiding all the penalties associated with closing your mortgage ahead of time. You will probably have to pay a few hundred dollars for that privilege, but that’s usually much lower than what the penalty would otherwise be. And since certain conditions apply to the portability clause, make sure you understand what they are ahead of time.

That being said, for a mortgage to be portable, the lender has to be doing business in the province where you will be moving. Therefore, signing a mortgage at a very low rate with a local institution might not be a good idea if your lender does not have branches in other provinces. If that’s the case, portability clause or not, you’ll be stuck and will have to close your initial mortgage, get a new one with another lender, and pay all the penalties and fees stipulated in your original contract. Because of our very unique situation – i.e., we tend to move more often than the average Joe – it is imperative that we deal with a financial institution that is present in every Canadian province and territory. In case of doubt, ask! Doing so might avoid you some misery down the road. And remember that the lowest rate is not always the best rate.

Do not be afraid to shop around and negotiate. Tell your lender that you are military, that you are likely to move on short notice, and ask for special clauses to be added to your mortgage, such as one that will limit the penalty to three months interest, or better yet, that there won’t be any penalty at all should you terminate the contract before the expiry of its term.

The portability clause offers some protection in case of a posting to another province, but not OUTCAN. Pay particular attention to the Interest Rate Differential (IRD) clause of your contract, the clause that explains that should you close your mortgage before the expiry of its term, you will have to pay the standard three months interest or the IRD, i.e., an amount somewhat equivalent to the interest that would otherwise have been paid had the mortgage not been closed, whichever is higher. This is particularly important for members who could potentially be posted OUTCAN because portability clause or not, Canadian mortgages cannot be taken out of the country.

In 2011, an agreement in principle was reached with 11 financial institutions in Canada to limit the IRD penalty to three-months interest or $3,000, whichever is higher, provided the lender could obtain a copy of your OUTCAN posting message. Back then, the penalty could be claimed under our core/custom and/or personal moving envelope. A few months after the agreement was signed, Treasury Board put an end to that benefit. Now, if you terminate a mortgage contract and are charged a penalty, it comes straight out of your pocket with no hopes of it ever being reimbursed. So make sure your mortgage contract says that in the event of an OUTCAN posting, there won’t be any penalty for discharging your mortgage ahead of time. And make sure to negotiate this before signing on the dotted line. Renegotiating an already signed contract is a near impossible thing to do.

If you are unsure of what kind of mortgage, what term, what amortization period are best for you and your family, talk to an independent mortgage specialist. And remember: you probably would not buy a $30,000 car in 20 minutes, so why should you sign a mortgage contract in that short of time? Shop, shop, shop, and really get what is best for you, your family and your particular situation.

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