Mortgage Penalties

One of the biggest questions people need to ask when getting a mortgage is what will be my penalty if I break the mortgage.

This is so huge, seriously even more important then the interest rate you receive.  Within reason.

The mortgage penalty you receive if you break your mortgage can be calculated in many different ways.  Unfortunately our Minister of Finance, Jim Flaherty is not looking at protecting consumers, just protecting the big 5 banks. 

Below is a basic explanation between IRD (interest rate differential) and a three month interest penalty.

Let's take a quick look at 3 most popular ways on how mortgage penalties are calculated, imagining you are 2 years into a 5 year term with a 3.29% rate with a balance of 300k on your mortgage.  The lenders best current rate is 3.49%, bond yields are at 1.49% and posted rate at 5.29%.

• Lender A:  Your current rate compared to the posted rate.  Posted rate at 5.29% - 3.29% = 2.00%, so basically your penalty will be 2% amortized over the remaining three years, or to put it in reality $17,102.37 IRD plus discharge and/or re-investment fees $300 to $1,000.  Ouch!
• Lender B:  Your current rate compared to bond rate.  Your rate 3.29% - 1.49% bond rate = 1.80%, so your penalty will be 1.8% amortized over the remaining period which will work out to $15,379.94 IRD plus discharge and/or reinvestment fee.  Shitty!
• Lender C:  Your current rate compared to the lenders best discounted rate.  Your rate being 3.29% and the banks discounted rate at 3.49%.  You can see that if you broke your mortgage the bank will actually be able to lend that money out at a higher rate so the penalty will simply be 3 months interest or $2,445.46 plus discharge and/or reinvestment fee.  Much better!

Now let's just say you can get a lower rate and a Lender C.  That's a good deal plus if rates do drop you have a lower rate that a IRD will calculated on.  If rates go up your penalty will simply be 3 months interest. 

Rate is important but if you look at Lender A, is having a good rate going to benefit you if you break your mortgage and rates go up?  NO!!  It will make matters worse as the gap between posted and your discounted rate is bigger.  It should be illegal.  The bank is double dipping by charging you a massive penalty then lending that money out at higher rate.

With lender B markets would have to increase significantly before the spread between your rate and the bonds will be eliminated.  In the world we have now I would not be expecting that to happen.

Let's look at one more thing.  Let's say your favourite bank offers you a rate that another lender can't match.  (FYI, I'll always beat it.)  There is a difference 0.10% which works out to $15.61 a month, over the two years you have had your mortgage that is a total of $374.64 you would have saved.  But you decided to go with Lender A for the cheaper rate but life threw a curve ball at you and you have to break your mortgage.   Sorry, you are screwed, literally.  Me personally I would look at the higher amount as an insurance premium protecting myself.

You never know what life will throw at you.  There are many reasons mortgages must be broken, unexpected job loss, unexpected child or expected, could be work relocation, money needed for medical, a bigger home needed.  Whatever.  Most people say they will not move or break their mortgage but 75% of 5 years terms are broken within the 1st three years.

The best scenario is the best rate and terms, that is why you call me.

PROTECT YOURSELF AND FAMILY, talk to someone who is truly looking out for your best interest and wants referrals from you and your family and is looking for clients for life.

Let me know if this was helpful, thanks.

Till next time, have a great day.

Ron Miller


905-667-0699
1-855-684-8326
ron.miller@butlermortgages.com
YouTube Hamilton Broker
@HamiltonBroker

Divorce and Mortgages

The purpose of this post is to inform consumers that you can refinance up to 95% in a divorce situation if one spouse wishes to buy out the other from the matrimonial home.  The relationship could also be common law, you do not have to be legally married. 

It is a process that not many lenders are willing to do with the new mortgage rules maxing refi's at 80%.  In fact most people in the industry do not even know it can be done.  There has been a provision put in place by the family law act allowing one spouse to take over the home from the other.  Because of the 80% refinance rule families were forced to sell their home in order to split up the equity, which is really unfair especially if children were involved.  With this new rule it can make the transition for children much easier.

There must be a legal separation agreement in place in order to do this.

Any equity that is left over can be used to pay off the other spouse if that is in the agreement. 

Of course you have to fully qualify on your own with acceptable credit and income.  Alimony and child support do qualify as acceptable income.

The existing equity is used as the down payment and closing costs.

It is expensive enough getting seperated or divorced especially if you have to pay huge real estate fees.  Average commission in selling a home is 5% + HST, it is much cheaper if one of you can keep the home.

If you are in this situation and would like to know more feel free to contact me which ever way works best for you.  You can also fill out the mortgage application if you wish to get started right away, I will contact you immediately, provided I am not golfing.  If you prefer doing things in person I have an office in Mississauga as well as Hamilton or I can meet you at your home.

There is no charge from me on this type of mortgage provided we can use an "A" lender and a minimum 5 year term is used.  There may be an appraisal required, not always.  Also a lawyer must handle the transaction.  We walk you through the whole process, it is actually quite simple. 

I can only service clients in Ontario Canada.  If you are in another province feel free to ask for a mortgage agent in your area and I will do my best to find one.

Till next time, have a great day. 


Ron Miller

905-667-0699

1-855-684-8326
ron.miller@butlermortgages.com
YouTube Hamilton Broker
@HamiltonBroker