Mortgagors incur borrowing costs on three occasions:

1. At origination
   (i.e., closing costs)
2. During the term
   (payments and misc. fees)
3. At discharge
   (penalties, discharge fees, etc.)

If you pick the right mortgage from the outset, you can minimize costs at each stage.

Besides the term and interest rate, numerous characteristics impact borrowing costs, including:

• breakage restrictions
• refinance flexibility
• prepayment provisions
• readvanceability
• portability
• mortgage penalty calculations
• rate conversion policies, and so forth.

This week in the Globe & Mail we endeavoured to quantify the value of different mortgage features… the goal being to determine how much more one should pay for mortgage flexibility.

This was done by running a series of basic simulations. Each was based on standard and reasonable assumptions intended to model the “average borrower.” (In reality, we’re all unique so it’s tough to find Mr. or Mrs. Average in practice.)

With the simulation results in hand, it’s then possible to compare:

• the hypothetical borrowing cost of a mortgage without a given feature, to
• the hypothetical borrowing cost with that feature.

This is something that any good mortgage planner can do for you. (It’s easier than it sounds.) And their numbers will be better than our general estimates because they can run scenarios specific to you.

As an example, you may guesstimate that there’s a 50/50 chance you’ll need to increase your mortgage before maturity. In that case, you’d want to know (at least in theory) how much it might cost you to take a low-frills mortgage where you cannot refinance without paying a penalty. With that information, you can then ask, “Is it worth the 10-15 basis points in savings for this tradeoff?”

We entertain this very question and others in: What is mortgage flexibility worth?

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Rob McLister, CMT