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

Mortgage on Million Dollar Homes

I have had quite a few inquiries lately on people having trouble financing large purchases so I figured a post was needed.

First and foremost I will explain how default mortgage insurance comes into play.  If you are purchasing a home that cost $999,999 you can get away with putting down as little as 5%.  If the purchase price of the home is $1,000,000 you have no choice but to put down 20%.  This may not seem fair; which I do agree, but the governments angle is to protect the Canadian housing market.  If something does go wrong, high end homes are the first to crash and crash harder.

Houses in this bracket only make up about 0.1% of homes sold in Canada so it is a very small bracket of consumers.  For the people that do fall in this bracket keep reading and I will explain the financing options.


ALL LENDERS ARE DIFFERENT.  I made this statement bold and capitalized because one of the biggest misunderstandings in the mortgage world is all banks are the same.  In reality, if your current lender says no you do not qualify, it does not mean another lender will not do the deal.  Obviously your lender is not going to tell you to go the bank next door.

Generally at some point each lender has a maximum loan to value they will lend on.  For example, X lender says we will finance up to 80% of the first million then 60% of the rest.  So if you are purchasing a home at 1.5 million they will finance 80% of $1,000,000 which is $800,000 and 60% of $500,000 which is $300,000 for a total of a $1,100,000 mortgage.  You would need to come up with a $400,000 down payment.

Some lenders will use 80% of the entire amount up to 2 million or even higher.  So in the 1.5 million purchase the down payment required would only be $300,000.  Down payment requirements also vary on the type of property; if it is a farm or a rental, is it in the city or rural area?


Rates can vary quite a bit at this level, often times consumers may be a little perplexed when they are not receiving the best rates advertised.  Some lenders will offer best rates on these mortgages and others consider them high risk even if you have 800 credit score and provable income.

At this level of purchase you really want to make sure you read the fine print, beware of collateral mortgages unless you understand them and this is what you want, and make sure you understand the pre-payment privileges and penalties.  Not knowing and signing something unfavourable could literally cost you tens of thousands of dollars.   

One thing that also helps a lot if you are working with a broker, do not be shy about admitting net worth, this is a huge part making your application favourable.  Would you lend a million dollars to someone who barely has enough money to cover closing costs?  Disclose any assets you have it will only help.

If you are using self declared income don't sweat it, there are still ways to get this done.

One last thing to keep in mind, financing at this level requires a broker who really knows what they are doing.  There can be massive savings in payments from lender to lender, you want to make sure you are using a very large volume brokerage that does business with many lenders.

If you have any questions don't hesitate to contact me which ever way works best for you,

Till next time, have a great day.


Ron Miller


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

Best Mortgage Rates

The purpose of this post is to bring awareness about how dangerous some of the low interest rate mortgages being advertised are.

It is a very wise idea to shop around for the best mortgage rates, after all it can save you thousands over the term of your mortgage. 

Recently a personal friend called about the renewal notice he received from his current lender.  They actually offered him 5.29% for a 5 year term; insane.  We renewed him at 2.99% with friendly terms.  His mortgage was for 200k which worked out to a savings of $15,058 over 5 years.  Even a 0.1% difference could save $616.80 over 5 years, better in your pocket than the banks.

Having said that it is equally important to pay close attention to the terms and to make sure you fully understand what you are signing.  There are many terms to look at, below are a couple of the majors.   

The two major pitfalls you should be looking for are:

     1.  How is the penalty calculated if you decide to break your mortgage?

The majority of 5 year term mortgages are broke before the renewal date arrives.  Knowing this you always want to have an out, even if you do not plan on selling.  Occasionally unforeseen circumstances may arise and you do not want to be at the mercy of a bank.  They show no mercy.

You want to ask your mortgage officer or broker for an example if you broke your mortgage in 2 years what your penalty will be and how it is calculated.  A lot of these discounted rates base the calculation on the current posted rate.  Imagine you signed up for the 2.99% and in 2 years decide you need to sell the home or refinance for whatever reason.  Your penalty could be calculated on 5.29 (current posted rate) - 2.99 (current discounted rate) = 2.30%.  So you will pay a penalty of 2.3% on your remaining mortgage balance for 36 months.  If for example you have a 200k mortgage, your penalty could potentially be $13,800.  Pretty damn scary.

There is no set way that any lender must base their penalty calculations.  To protect yourself always ask what the comparison rate will be in case you do have to break your mortgage.  Generally what you are looking for is a comparison rate that is fair and based on current discounted rates.  For example if you decide to break your 5 year 2.99% in two years your want to see your lender comparison rate be the current 5 year discounted rate or the 3 year discounted rate.  With interest rates as low as they are now, most likely you will end up with just a 3 month interest penalty.  If the comparison rate is the posted rate, run and run very fast, this is not a good deal.

     2.  Is your mortgage going to be registered as a collateral mortgage?

Please click on the link for a little more detail on what a collateral mortgage is.  In a nut shell, they are bad bad bad.  The only people who should be obtaining a collateral mortgage are people in a strong financial position.  

Quick scenario ~ Let's say you have a 200k mortgage and a bank signs you up with a collateral mortgage.  Then they offer you a line of credit to go with it, you also get a car loan and a Visa down the road.  Now your renewal date has arrived so you decide to shop around because you were offered a lousy rate, say 5.29%.  A broker offers you 2.99%, great lets get started.  At some point it is discovered you have a collateral mortgage and didn't even know it.  Well a collateral mortgage is not transferable, it must be handled as a refinance (lawyer fees).  Also we now find out your line of credit, car loan and Visa are all charged against your home.  The only way to handle your file is if you pay off all your other debts against the home first or throw all the debts into the new mortgage.  Problem!!!  There is not enough equity to refinance everything and you don't have enough available cash to pay out all the other debts.  Guess what???  Yep you guessed it, you are going back to your original lender and accepting the lousy rate.  You have been euchred, not a good feeling.

Remember, terms are just as important as rate. 

I really hope this posts will help out a lot of people, I am a little dramatic in this one but it is so crucial that you are getting your mortgage from someone that is trustworthy, as well knowledgeable in the industry.   And wants to see repeat business and referrals from your friends and family in the future.  Use a good and reputable mortgage broker.

Please reply or discuss, ask some questions.   

Till next time, have a great day!

Ron Miller

905-667-0699

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