Life Happens. Unexpectedly. Sometimes it’s awesome – sometimes not so much. Life events can lead you to refinance your mortgage or pay it out in full – with penalties.
Penalties to break what appears to be the exact same mortgage can vary by over 1,000% …. why?
It’s all in the fine print – what some Bank and Lender management refer to as Strategy. Unfortunately, some Banks and Lenders prey on the fact that the odds of someone breaking a mortgage are very high. Marriage splits are probably the leading cause.
Their “Strategy” is to offer attractive or competitive up front mortgage rates knowing they can earn a lot more in the future from penalties. It’s very similar to 0% credit card offers – until one payment is a day late – and then everything is at 19.99% With a little knowledge, you can be smart enough to see through these games – smart enough to ask the right questions when speaking with your Bank or mortgage lender.
For example. Let’s say you took a $300,000 mortgage out 2 years ago at a very fair 3% with a 5 yr fixed rate term. Now, you need to pay the remaining $280,785 it out in full. We’ll assume that posted rates at the time were 5% and that you are paying biweekly.
CIBC would charge a penalty of approx. $13,778 today to pay that mortgage out in full! See their own calculator for details here. Don’t forget to the rate discount they gave you off posted rates – they’ll want that back too.
RBC would charge a penalty of approx. $8,290 to pay that mortgage out in full! See their calculator for details here.
First National, a non-branch mortgage lender in Canada would charge approx. just $4,346 for the same mortgage balance and rates. Of course, they also have a calculator here.
In fact, because of practices around mortgage penalty calculations, the federal government required mortgage lenders to make available calculators for consumers to use when comparing options. They are not always the easiest things to find. Rather than trying to dig around inside a website, we have found google can be the quickest way in by searching for lender name, mortgage penalty calculator.
Where you get penalized is with the Interest Rate Differential calculation or IRD. This is, in essence, the lender saying – “protect me in this mortgage contract – if you want out, ensure that my return will not be affected.”
Unfortunately, most borrowers are focused purely on interest rate and unless they are working with an experienced Mortgage Broker, they can’t ask or investigate what they don’t know about. Media – and most lenders – promote interest rate alone. Consumers get caught.
Be smarter. Understand that rate isn’t everything. Even if you were able to get 2.99% from a branch compared to 3.09 from a non-branch lender, that 0.1% difference in rate can end up costing you$4-7,000 in the above example. Although, it’s rare that non-branch lenders have higher rates than local branches.
RATE IS NOT EVERYTHING.
In this post, we are highlighting the differences in penalty calculations. There are many attempts to shave 0.1% of interest rates by increasing penalties in different way. By reducing or eliminating your ability to pay more quickly. By removing the portability of your mortgage – and more.
Lenders know that many borrowers won’t make it to the end of the mortgage term, regardless of what term is chosen. Statistics don’t lie.
Help yourself by using a Mortgage Broker who has access to dozens of mortgage lending options. Find one who is aware of the differences between mortgage products that goes beyond mortgage rate. Get advise and counsel on options. Allow them to help protect you from what you may not already know. Working with a Mortgage Broker that can share strategies and tactics to pay your mortgage down more quickly – saving interest rather than setting you up for higher costs – can literally pay dividends.
That is our focus – and the challenge we set for ourselves. Contact us at every mortgage event – purchase, refinance and renewal – to understand your options so you can make a fully informed and strategic decision – instead of following along the path laid down for you by your lenders’ executive.