Why the Lowest Rate Isn’t Always the Best Mortgage: The 3 Mortgage P’s

mortgage rate

Look beyond just the rate when shopping for a mortgage.

Shopping for a mortgage is a lot more than simply finding the mortgage with the lowest rate. You wouldn’t shop for a condo by lowest list price only, ignoring other factors like maintenance fees, amenities and location. So don’t do it with your mortgage. The lowest mortgage rate may be the best mortgage, but there’s no guarantee. Although a slightly lower mortgage rate can help you save thousands of dollars in interest over the life of the mortgage, it may not be worth it. It may come with restrictions like stiffer mortgage penalties, limited prepayment privileges and shorter closing times (some lenders offer a lower rate when your mortgage closes in 30 to 45 days). In some cases, it can actually make sense to choose a mortgage with a slightly higher rate (e.g., 0.10% to 0.20% higher than the lowest available rate). So do your homework: you might be better off with a mortgage with a slightly higher rate and better prepayment privileges, say.

Here are 3 important factors besides the rate – what I like to call the 3 Mortgage P’s.

1. Penalties

When you sign up for a mortgage, breaking it is probably the last thing on your mind. But sometimes life happens—you get sick, lose your job or accept a promotion in another city—and you end up breaking it. In Canada, where the five-year fixed-rate mortgage reigns supreme, about 70% of people change their mortgage before the end of its term. Given that the odds are stacked against you, take the time to ask your lender about any penalties before signing up for the mortgage. Mortgage penalties are meant to compensate your bank for lost interest.

In Canada, mortgage penalties depend on the type of mortgage. If you have a variable-rate mortgage, you’ll pay 3 months’ interest, but if you have a fixed-rate mortgage, you’ll pay the greater of 3 months’ interest or something called the interest rate differential (IRD for short). The IRD is calculated by looking at current mortgage rates and your remaining mortgage balance.

If you’re signing up for a fixed-rate mortgage, ask how the IRD is calculated. Is it based on the posted or the discount rate? If it’s based on the lender’s inflated posted rate, consider this carefully before signing up. Your mortgage penalty could add up to thousands of dollars. If you do decide to break your mortgage, prepay as much of it as you can to reduce your penalty.

2. Prepayments

If you’d like to pay down your mortgage sooner rather than later, prepayment privileges are a must. Banks are pretty flexible with payment privileges. Most let you prepay, each year, between 10% and 20% of your original mortgage balance as a lump sum. This is only one prepayment option. Others include increasing your payment and doubling up your payment.

When shopping for a mortgage, ask which prepayment privileges are offered and the percentage you can prepay. With my lender, after my mortgage anniversary (the date I signed up for the mortgage), each year I could increase my payment by 15%, double up my payments and make lump-sum payments totalling 15% of my original mortgage balance. Unlike regular mortgage payments, which are split between interest and principal, prepayments go straight toward principal. Prepayments can shave years off your mortgage and save thousands of dollars in interest over the life of your mortgage.

3. Portability

Portability means your mortgage can come with you if you decide to move—that is, you can transfer the mortgage to your new property. If you’re buying a more expensive home, you may be able to “blend and extend” the mortgage by combining your existing mortgage with the mortgage for your new home. Portability is a great feature—it can save you from paying thousands of dollars in mortgage penalties. It also helps if your mortgage is assumable. With an assumable mortgage, you can leave it behind for a new qualified buyer instead of breaking it, avoiding costly mortgage penalties.


Sean Cooper is the author of the upcoming book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available for pre-order now on Amazon and in bookstores March 1, 2017.