This man had to pay $30,000 in a Mortgage Penalty! What would you have to pay??

[MortgageQueen]

This is a must read for anyone seeking a new mortgage or refinancing. If you want to avoid this costly mistake. . . see a mortgage broker.

As the housing market thaws from a cold winter, mortgage rate specials are popping up like spring flowers. But even as they compete to offer rock-bottom rates, banks have largely kept their posted mortgage rates unchanged.
Few borrowers give posted rates a second glance, since they’ll rarely be paying the actual sticker price on a mortgage.


But those posted rates aren’t just for show. They play an important – and profitable – role in the mortgage businesses of Canada’s major banks, one that many borrowers ignore at their peril when they go shopping for the lowest rates.


First, posted rates matter for borrowers seeking a variable rate mortgage. The federal government views variable rate mortgages as more risky and it has sought to limit their growth by requiring borrowers to meet the qualifying standards for the higher posted fixed rate. (For instance, posted five-year mortgages currently average 4.75 per cent, while banks are offering variable rates as low as 2.20 per cent).


Meanwhile, fixed-rate borrowers can qualify based on the actual rate they’ll be paying, which is almost always much lower than the posted rate.


Usually, that means borrowers can qualify for much more money than if they applied for a variable rate mortgage. As a result, the majority of borrowers opt for fixed-rate loans. That works for lenders since they generally make more money off of fixed-rated mortgages.


More importantly, banks use posted rates to calculate fees for borrowers who break their fixed mortgages early.
When interest rates are rising, banks typically charge a penalty that works out to three months’ worth of interest payments on a mortgage. But when rates are falling, and when people are more likely to try to get out of their mortgage, banks often base their penalties on something called an “interest-rate differential.”


Each bank calculates this slightly differently, but it usually involves the difference between the posted rate on a mortgage at the time borrowers signed the contract and the posted rate on an equivalent mortgage at the time they cancel. Some banks also add in the discount borrowers are actually getting off the posted rates.


In most cases, a penalty based on an interest-rate differential can be tens of thousands of dollars higher than a penalty based on three months’ interest. (The penalty to break a variable rate mortgage is based on the three months’ of interest payments).


There is a logic behind the interest-rate differential. When borrowers break their mortgages earlier to take advantage of falling rates, banks lose the profits they would have made off the mortgage, since they must now lend out the money to a new borrower at a lower rate.


However, the practice has raised the ire of many borrowers and brokers, who object to banks calculating these penalties based on posted mortgage rates rather than rates that homeowners are actually paying. It is also the main reason why prepayment penalties haven’t shrunk even though mortgage rates have come down.


Take Brian, for example. With three years and $520,000 left on his five-year mortgage, Brian (who didn’t want his last name used) is getting ready to sell his Vancouver home in order to downsize. He’s now facing nearly $30,000 in fees to break his mortgage early, a calculation based on the difference between the 5.24 per cent posted rate on his mortgage when he first signed it two years ago and the 3.39 per cent posted rate his bank is offering today on a three-year mortgage (because Brian has three years left on his mortgage.) The bank uses these numbers despite the fact that Brian’s actual mortgage rate is just 2.79 per cent. Had the penalty been based on three months’ of interest payments, it would have been around $3,627.


Brian was prepared to pay some kind of penalty for breaking his mortgage early, but expected it would have been one based on the rate he is actually paying and not the posted rate. “The idea is sound. I’m even OK with how the calculations are done,” he said in an e-mail. “It’s just they use numbers completely unrelated to my actual commitment.”

Written by/for:
Tamsin McMahon, The Globe and Mail
7:59 AM, E.T. | March 19, 2015

[macw1960]

Ouch!!!

[tjthemanto]

Yup ..what a scam by banks !

Either the IRD penalty should be based on the rate you are are paying , & NOT some posted rate that was there when you signed

Lot of people don't even know , what the posted rate was then ..not even sure if the MTG agreement mentions that posted rate and if it does its probably buried somewhere in the back pages in fine print.

The discounted rate you are paying is probably mentioned in bold & on the front page , but the IRD penalty & the posted rate ( then ) is probably in the fine print somewhere else.

Most people are aware of the 3 months penalty &/or the IRD penalty . But NOT many know about the calculation being based on the posted rate ( then ) and not on the discounted rate which they are actually paying.

[Colsgirl]

That is why they say if you are planning to move go variable or fixed rate for a shorter term e.g. one year and keep renewing.

[dougboswell]

That is why they say if you are planning to move go variable or fixed rate for a shorter term e.g. one year and keep renewing.

The only problem is that 1 year variables are usually only offered by credit unions and the rate can be high. 1 year fixed rates are high also. Interest rates will rise, both fixed and variable, but nobody can accurately say when. You could keep renewing 1 year terms and at the year end find the rate has jumped and so has your monthly payment.

If you are planning on moving it would make sense to take a 5 year fixed with its low rate and ensure the mortgage can be ported. Your payments stay fixed for 5 years and you can put lump sums down so any increase at the end of 5 years won't have much effect on your payments.

[dougboswell]

This is a must read for anyone seeking a new mortgage or refinancing. If you want to avoid this costly mistake. . . see a mortgage broker.

As the housing market thaws from a cold winter, mortgage rate specials are popping up like spring flowers. But even as they compete to offer rock-bottom rates, banks have largely kept their posted mortgage rates unchanged.
Few borrowers give posted rates a second glance, since they’ll rarely be paying the actual sticker price on a mortgage.


But those posted rates aren’t just for show. They play an important – and profitable – role in the mortgage businesses of Canada’s major banks, one that many borrowers ignore at their peril when they go shopping for the lowest rates.


First, posted rates matter for borrowers seeking a variable rate mortgage. The federal government views variable rate mortgages as more risky and it has sought to limit their growth by requiring borrowers to meet the qualifying standards for the higher posted fixed rate. (For instance, posted five-year mortgages currently average 4.75 per cent, while banks are offering variable rates as low as 2.20 per cent).


Meanwhile, fixed-rate borrowers can qualify based on the actual rate they’ll be paying, which is almost always much lower than the posted rate.


Usually, that means borrowers can qualify for much more money than if they applied for a variable rate mortgage. As a result, the majority of borrowers opt for fixed-rate loans. That works for lenders since they generally make more money off of fixed-rated mortgages.


More importantly, banks use posted rates to calculate fees for borrowers who break their fixed mortgages early.
When interest rates are rising, banks typically charge a penalty that works out to three months’ worth of interest payments on a mortgage. But when rates are falling, and when people are more likely to try to get out of their mortgage, banks often base their penalties on something called an “interest-rate differential.”


Each bank calculates this slightly differently, but it usually involves the difference between the posted rate on a mortgage at the time borrowers signed the contract and the posted rate on an equivalent mortgage at the time they cancel. Some banks also add in the discount borrowers are actually getting off the posted rates.


In most cases, a penalty based on an interest-rate differential can be tens of thousands of dollars higher than a penalty based on three months’ interest. (The penalty to break a variable rate mortgage is based on the three months’ of interest payments).


There is a logic behind the interest-rate differential. When borrowers break their mortgages earlier to take advantage of falling rates, banks lose the profits they would have made off the mortgage, since they must now lend out the money to a new borrower at a lower rate.


However, the practice has raised the ire of many borrowers and brokers, who object to banks calculating these penalties based on posted mortgage rates rather than rates that homeowners are actually paying. It is also the main reason why prepayment penalties haven’t shrunk even though mortgage rates have come down.


Take Brian, for example. With three years and $520,000 left on his five-year mortgage, Brian (who didn’t want his last name used) is getting ready to sell his Vancouver home in order to downsize. He’s now facing nearly $30,000 in fees to break his mortgage early, a calculation based on the difference between the 5.24 per cent posted rate on his mortgage when he first signed it two years ago and the 3.39 per cent posted rate his bank is offering today on a three-year mortgage (because Brian has three years left on his mortgage.) The bank uses these numbers despite the fact that Brian’s actual mortgage rate is just 2.79 per cent. Had the penalty been based on three months’ of interest payments, it would have been around $3,627.


Brian was prepared to pay some kind of penalty for breaking his mortgage early, but expected it would have been one based on the rate he is actually paying and not the posted rate. “The idea is sound. I’m even OK with how the calculations are done,” he said in an e-mail. “It’s just they use numbers completely unrelated to my actual commitment.”

Written by/for:
Tamsin McMahon, The Globe and Mail
7:59 AM, E.T. | March 19, 2015

The article leaves a few questions unanswered.

Is he downsizing to buy a new smaller house? If he is why is he breaking the mortgage rather than porting it to the new house saving the $30000?
Why does he have to sell now? Rather than fork out $30000 why doe he not delay selling until he is closer to the end of his term.
If he took out a $600000 + mortgage why did he not ask how the penalty is calculated if he breaks the mortgage midterm? He might have had second thoughts if he had asked or sought out another lender who calculates the IRD so that it favours the client and not the lender.

[MortgageQueen]

I don't think that was the point of the article. We can assume the gentleman had to break it for whatever reason he had.
I believe the point was IF you must break a mortgage. . .this is the consequence if you don't take precautions, such as research the IRD or have a Broker protecting your interests. It's also pretty safe to assume, a major bank is likely to be a much larger penalty.

[tjthemanto]

Just wondering , is the penalty for a VARIABLE mortgage always just 3 months interest penalty , or can it be something else ..irrespective of whether its a closed or open VARIABLE Mtg.

If that's the case going for a Variable Mtg. is a NO brainer in todays economy. As I don't see the rates going up anytime soon & with stuff like layoffs etc , you never know when you might have to break your MTG or move somewhere else for a job.

[MortgageQueen]

Just wondering , is the penalty for a VARIABLE mortgage always just 3 months interest penalty , or can it be something else ..irrespective of whether its a closed or open VARIABLE Mtg.

If that's the case going for a Variable Mtg. is a NO brainer in todays economy. As I don't see the rates going up anytime soon & with stuff like layoffs etc , you never know when you might have to break your MTG or move somewhere else for a job.

Yes! There is what's called a "No Frills" or "Basic" variable mortgage with certain Lenders.
The Good news. . . is you get a slightly bigger discount.
The Bad news is if you break the mortgage, the Penalty is 3%!!

I just did one for the first time this week (because I highly discourage this risk to my clients)
In this particular case though, it was only a $100k mortgage, the clients were fully
aware of the penalty but because it's their retirement home and the fact that they are both high income earners, they felt a potential $3k (or less) penalty was no big deal.
So there are uses for them. It's just generally speaking, the deeper discount isn't even worth it. . . .may be if you're in the high range of mortgages, you'll see some noteworthy savings.

[Dan in Canada]

So the penalty for breaking a variable rate mortgage can be 3%?

[MortgageQueen]

Yes. "Some" of the discounted variable rate mortgages are set up that way.