Reading the mortgage fine print

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When Mika Suokonautio and Sian Sills bought their $355,000 Toronto home three years ago, their biggest concern was the amount of their monthly mortgage payment, followed by interest rates and payment flexibility.

The couple, both elementary school teachers, settled on a 40-year, 5.09-per-cent fixed-rate mortgage with no down payment through Royal Bank of Canada. The smaller monthly payments freed up cash for home repairs, travel and the standard of living they wanted.

"I know we'll be paying the bank forever, but whatever," joked Mr. Suokonautio, 36, adding the couple plan to pay it off much sooner. To stick with the 40-year amortization, he said, would be like paying off the house three or four times, once interest is factored in - an idea he finds "depressing."

"I don't want to be paying a mortgage 40 years down the road. God help me if I'm still working just to pay my mortgage."

Is this a good time to lock in or refinance your mortgage?

The type of mortgage Mr. Suokonautio has is no longer available in Canada. In an effort to prevent a U.S.-style real estate collapse, the Department of Finance tightened the rules on mortgages in 2008, reducing the maximum amortization from 40 years to 35 and requiring that all mortgages have at least a 5-per-cent down payment.

It was a positive and necessary change, says Laurie Campbell, executive director of Credit Canada, a non-profit organization dedicated to credit education.

This week, Credit Canada and the CAAMP Foundation, the charitable arm of Canada's national mortgage industry association, announced a joint agreement to provide Canadians with the education they need to make wise decisions about mortgages. Phase one is an online initiative, with tutorials, mortgage calculators and interactive tools. Phase two is getting that information into classrooms across Canada.

As a member of Canada's Task Force on Financial Literacy, Ms. Campbell says it's crucial to provide consumers with preventative education before they buy a home, something that was not available when she bought her first home.

"People are often embarrassed to talk about what they don't know, but it's worth it," Ms. Campbell said. "It's worth taking the time, and understanding that most people don't know this information until they're ready to buy a home."

Paul Grewal, chairman of the CAAMP Foundation, says most first-time home buyers don't understand the finer points of a mortgage, such as penalties for breaking a mortgage or the risks and benefits of fixed and variable rates.

Ms. Sills, for example, said she recently considered refinancing their mortgage and was stunned to be told it would cost them $18,000 in penalties.

"Most clients, when they are arranging a mortgage, they are more interested in, 'What's my payment going to be? What's the interest on my mortgage?' They don't look at the other features that might be important to them in making a sound decision," Mr. Grewal said.

"We've got a lot of immigrants coming into the country. We've got a tremendous amount of first-time home buyers. There's a very active real estate market here in Canada and has been for the last several months, so I think it's important for consumers to understand that a mortgage is more than just the interest rate and payment."