Small Print = HUGE PENALTIES……. unless you get advice from the proper Broker of course
A large number of Canadians break their mortgage or refinance
(check out our blog on refinancing here), prior to the end of their term for a number of reasons, i.e. wanting to pay off debts to pulling out some money for reno’s to wanting to upsize/downsize etc.Penalties to break the exact same mortgage can vary between banks by over 1,000%…..why??
Unfortunately some banks prey on the fact that the odds of someone breaking their mortgage are very high.
Their “Strategy”: offer an attractive “up front” rate knowing they’ll be able to hammer the majority of those who take the bait with huge fees down the road. (Similar to those 0% credit card offers… miss the payment date and is 19.99% backdated to the very 1st date and dollar!) You’re smart enough to see through that, so be smart enough to ask the right questions when speaking with certain banks. However, we don’t like to name names here……cough cough……..BMO……CIBC……..
Lets just say you currently owe $300,000 on your mortgage, there are 4 years remaining in your 5 year term and you have a decent rate of 3.09%. CIBC will want $10,961.13!!!*
(their online mortgage breakage calculator here), Oh, and don’t forget to add in the rate discount you received……cause they’re going to want that back.
But you…..you’re savvy…..you went to BMO and got that awesome 2.99% 5 yr rate. Ok, let’s say you have 4 years remaining on that 5 year term. What would you owe if something happened?$32,633.28!!** But hey, at least you can brag to your friends that you landed an awesome 2.99% rate right?
(Our blog on BMO’s 2.99% offer to get the full facts)
Our “Strategy”: Let’s say your Mortgage Broker educated you on the above, then recommended another lender who also offered the 3.09% rate like in our CIBC example.
In this case we’ll use First National Broker Lender. What would your breakage be here for the same mortgage? $2,373.55***. So in this case, your 2.99% bragging rights only cost you $30,259.73 which is well worth it…….I suppose. We’ll further actively “Manage Your Mortgage” for you each year, making small changes to help pay off your mortgage faster, have a lower balance at maturity and thus save you thousands more compared to the small difference of .10% b/w 2.99 to 3.09%. Ever noticed your bank doesn’t call you each year to payoff the mortgage faster, thereby earning them less profit? (don’t be sad, you’re not alone) We’re NOT the bank; we want our clients paying least amount of interest and respect your business to continue to offer service up to AND after closing.
So why is this and why is it IMPORTANT TO YOU? Rate is NOT everything. (as with most things, you get what you pay for in life) There is so much more to a mortgage, and rate is simply the lure of the uneducated as we get it, 2.99% is less than 3.09% but we want to ensure you know what it could cost you in the long run. Statistically the odds are heavily against you that you will follow through with the entire term of your mortgage without any interruption and that you’ll take advantage of your pre-payment options. Banks know this… so enter the fine print. In the examples above the fine print used to calculate these penalties can be found, although with some difficulty, on the respective banks websites. Where you can get nailed is in how they calculate the interest rate differential (IRD). IRD will be explained in more detail in an upcoming blog. Using a Mortgage Broker who’s familiar with what ALL the available lenders out there offer (we currently work with 35 different ones) will greatly help you to avoid these major and devastating pitfalls. Before you buy your next home, take out equity to pay off debts or renovate or whatever, contact us.
We’ll ensure you’re protected and of course, that you’re giving the banks the least amount of money possible.
*Using CIBC’s online Mortgage Prepayment Calculator based on a balance of $300,000 with 4 years remaining of a 5 year term at 3.09% with a $1433.63 monthly payment, 2% discount and 25 year amortization.
**Remaining interest owing on a balance of $300,000 with 4 years remaining of a 5 year term at 2.99% amortized over 25 years.
***Using First National’s online Mortgage Prepayment Calculator based on a balance of $300,000 with 4 years remaining of a 5 year term at 3.09% with a $1433.63 monthly payment.