We had a client come to us a few weeks ago, she was very excited as had some major projects she wanted to start with her home. She had been paying down her mortgage diligently for years and with rates being so low it was the perfect time to rethink her mortgage and access the equity she had built into her property.
Until we called her current lender.
Her last mortgage she had processed with her bank. The rate was OK at the time, and she had been such a loyal customer, they made it so easy for her to just sign, why would she go anywhere else? She had no idea the restrictions she had put on herself and now was trapped with no options and no choice.
She did not understand how her bank calculated penalties to break her mortgage early and now was looking at a $25,000 IRD (Interest Rate Differential) penalty! Even if she sold her home and didn’t move that mortgage to another property she was stuck with a $25,000 price tag on her penalty, eating up a large chunk of the equity she had worked so hard to accumulate.
You see, not all mortgages are created equal.
There are huge variances in the way lenders calculate mortgage penalties, to the point where regulators are pushing Ottawa to make changes. This exact same mortgage with some of the lenders we have access to still would have resulted in an IRD penalty – but the amount would have been $15,000 – that is a $10,000 variance! Needless to say it was not in the clients best interest to break her mortgage even though over the next four years we would have saved her over $4,200 in interest and reduced her mortgage balance by over $6,063 and given her an extra year at the super low rate of 2.59 vs the current 3.99 she was stuck in.
Mortgage Penalty calculations are very important to consider when choosing your next mortgage. Choosing a lender that doesn’t hide behind a confusing “posted rate” to calculate the penalty and uses discounted rates could save you thousands of dollars if you decide mid-term that you want to sell and buy a new property, access equity for low-rate financing of vehicles, children’s education, renovations or to buy an investment property.
There are many strategies we can help you with to avoid these types of penalties when choosing a mortgage. The lender, the term, the product, the type, and even the way a mortgage is registered are all important factors when choosing a mortgage and it is our job to find you the best one that meets your needs.
You see, these are not uncommon stories about mortgage penalties we hear and see every day. There is no crystal ball to know what will happen over the next 5 years that may require you to make a change in your financial situation. Flexibility with your largest debt and biggest asset is key to realizing your dreams as they happen!