So what’s the difference in pre-payment penalties?
Assisting you to understand that there is much more to a mortgage than the interest rate is one of the most important responsibilities I have to my clients. Even with the best laid plans the unexpected can happen so you need to be prepared.
There can be a great deal of difference between the big banks and other mortgage lenders, with the most important being how the mortgage penalties are calculated. Understanding how your mortgage lender calculates theses penalties could literally save you thousands of dollars should the unexpected occur such as having to sell your home and not being able to port your mortgage for some reason or needing to refinance prior to the maturity date of your current mortgage term.
Not all mortgage penalties are calculated the same. In simple terms, the big banks have two rates that they use to calculate your penalty – the posted rate and the discounted rate you received. To complicate matters they don’t all use the same posted rates either. Mono-lenders, who are some of the largest mortgage lenders in Canada and only available through mortgage brokers, generally only have one rate.
Here is a what-if scenario for consideration:
Last year you took a 7 year fixed term mortgage with your bank at a rate of 4.09%. You currently owe $300,000. You received a rate discount of 2.06%. At the time locking in the rate for 7 years was a good decision as there was much conversation by the experts that rates were going to go up. You would now like to break your current mortgage because there are some very deeply discounted variable rates available and you would like to take advantage of the rate discounts.
Here is a breakdown of how much it would cost you to break your mortgage depending on which lender you chose at the time:
Big Bank A – $27,667
Big Bank B – $18,180
Big Bank C – $12,659
Mono-line Lender (only available through a mortgage broker) – $4,439
There is a big difference based on how each lender calculates the pre-payment penalty.
April Dunn is a Mortgage Broker who has been assisting clients to purchase, refinance or renew their mortgages for over 20 years. April is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects and specializes in Strategic Mortgage Planning. April provides a full range of residential and commercial mortgage financing for clients all over the province of British Columbia and across Canada through the Mortgage Architects network. April can be reached at 250-826-3543 or april.dunn@mtgarc.ca