When mortgage maturity approaches, and it's time to renew your mortgage, you will receive a Renewal Agreement in the mail. 

The Renewal Agreement is often a very thick document that displays current interest rate offers together with mortgage terms. 

Most borrowers do not understand all of the terms and more than 50% of borrowers do not know how to interpret the offers being given in terms of dollars and cents. 

One example of this is an experience I recently had with a client who had her original mortgage with CIBC. Her CIBC mortgage was up for renewal and she locked into another five years. She mis-read the renewal agreement completely. What she failed to realize was that her low five-year rate was only an introductory rate for the first six months followed by a much higher interest rate for the rest of the five year term.

This meant that after the first six months she would end up paying almost one percent more than what other prime lenders were offering. 

This was a very costly mistake and one that could have been avoided if she understood her mortgage renewal terms.  

As always, mortgage renewal and mortgage maturity is an opportunity to seek a better interest rate and negotiate better terms. It's a time to save money. 

Please contact me today if you would like to discuss your mortgage renewal. 

If you prepay the entire balance of your mortgage loan before the end of its term, there will be a penalty to do so (i.e. exiting your mortgage in year 3 of a 5-year term). 

Here are reasons borrowers exit their mortgage term early:

1. They sell their home.
2. They refinance with another lender.
3. They pay off the balance with inheritance or personal savings. 

In order for your lender to calculate your penalty, they must follow a formula. Some lenders use a more expensive formula than others, and as a result, it is always beneficial to sort out how the lender’s penalties get calculated BEFORE you sign a mortgage contract. Of course, this exercise is necessary for any borrower who wishes to save money over the long haul. This is precisely a case of “failing to plan, planning to fail."

Here’s an example of a clause from CIBC Mortgages showing how a mortgage penalty will get calculated should the borrower exit their contract early:

If you have a fixed rate closed mortgage, your prepayment charge will be the greater of the following:

• three months’ interest on the amount you are prepaying. Interest will be calculated at your annual mortgage interest rate, plus any discount you
• received or
• the Interest Rate Differential on the amount you are prepaying.

What this means is whichever formula is more expensive, the bank will use to charge you a penalty. 

Three months worth of interest is easy to calculate, and using your interest rate, you can determine, at any point during your mortgage term, what the penalty will be. What you won’t know, however; is what the Interest Rate Differential calculation will be and if that will be higher than the three months worth of interest.

(If you have a variable rate mortgage, the penalty will always be just 3 months worth of interest). 


How do you calculate the “Interest Rate Differential?"

The Interest Rate Differential or “IRD“ (in mortgage lingo) is based on the total amount you are prepaying. Here, the entire balance is being paid off. 

The formula:

The Penalty will equal the mortgage balance x Differential amount x the total months remaining DIVIDED by 12 months. 

So, for example, 

$100,000 mortgage with an interest rate of 9% with 24 months remaining. 
The lenders’ current rate is only 6.5%
The differential is 2.5% (9-6.5%)

The issue with posted rates is they are not all the same and the higher the posted rate, the more expensive the penalty can be. BIG Banks (Royal Bank, TD Bank, CIBC, Bank of Montreal, Scotiabank, National Bank, etc.) all use the Bank of Canada’s POSTED RATE to calculate their mortgage penalties. 
None of these financial institutions, however; actually charge the client the posted rate on their mortgage loans. What the bank does instead is provides a discount off of the posted rate, which is then used in lieu of the current discounted rates they are offering to calculate the penalty. 

So for example, if your rate is 3.64%, but the posted rate at the time of the mortgage was 4.84%, they use the discount of 1.2% (4.84-3.64).

When it comes to smaller outfits or "monoline lenders" accessed exclusively through the broker channel, they often have similar prepayment penalty formulas except they plug in different numbers. Monoline lenders tend to use lower posted rates (not the Bank of Canada‘s) to calculate their penalties. 

So, for example, if you’re rate is 3.64% and the monoline‘s (broker-channel only) posted rate is 3.99%, the discount is only 0.35%. One can see how this would equate to a lower penalty when entering these numbers into a basic formula.

Using a mortgage balance of $280,000 at a rate of 2.99%, taken out on September 1, 2016, and maturing August 21, 2021, let‘s take a look at the difference in calculation based on the borrower exiting January 15, 2019. 

With CIBC Mortgages: 

Prepayment charge:$6,675.84
Calculation type:Interest rate differential
Learn more: Information on mortgage prepayment (open in a new window)
Remaining term:2 year(s), 8 month(s)
Comparison rate:3 year, 3.940%
Current balance:$280,000.00
Current Interest Rate:2.990%
Rate discount received:1.850%
Mortgage type:Fixed
Maturity date:2021/08/31
Prepayment charge
including cash back:$6,675.84


With a monoline lender (First National Financial LP) 
(Example of calculation below) 
Your estimated prepayment charge is
$2,093.00

There is definitely no debate about which lender has a better prepayment calculation.

Sometimes borrowers feel comfortable sticking to a major bank out of security and safety. It is a myth that big banks are safer than monoline lenders. If your lender should go bankrupt, they’ve already given you the money! 

The proof is always in the pudding, and the argument about prepayment penalties is clear. 


Have a mortgage question?
Contact me today
(647) 773-4849
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It seems that the housing market in Canada has "somewhat" stabilized. Interventions to slow down growth and inflation commenced in mid 2016. From the collaboration of the provincial governments to the OSFI (The Office of the Superintendent of Financial Institutions), and the Bank of Canada, this intervention has now materialized into slowing the housing demand. In addition, there have been steady interest rate hikes, the introduction of the mortgage stress test which makes borrowers have to qualify for a mortgage using the current contract rate plus 2%, and taxes on foreign buyers. 

There's also been some measures put in place to deter people from keeping properties vacant and some further restrictions on urban construction projects.  

On a national scale, however, the Canadian housing market still has a long way to go before it gains the level of housing affordability that it had before the current measures were put in place. There is also a possible risk that higher mortgage rates and the current stress test persisting could hammer down demand in areas such as the Atlantic and Prairie provinces, would could lead to declining prices and less sales. 

Due to all of the interventions noted, there have been significantly less overall sales. The only city that is currently experiencing price growth is Toronto after a year of steady declines. 

Also, despite the relatively low national inventory-to-sales ratio, the new-home market now faces weaker demand than at any time since the 2009 downturn, and this is showing in the price indexes for new homes, where first Toronto and then Vancouver have slowed drastically and dragged the national price index down with them. 

Tight demand relative to supply for condo units is only the start of the story.

Why is there a tight supply for condos?

In Toronto and Vancouver, smaller condos have a more advantageous and profitable use. As a landlord, rent is easier to garnish and tenants are willing to pay more. Single family townhouses in Toronto are also popular as more are for rent than for sale. 

What's the outlook?

Bank of Canada will continue to tighten short-term interest rates from now until 2020 and they will do this to head off inflation while also sustaining the value of our Dollar. This tightening will make mortgage interest rates rise, and based on Moody's Analytics, interest rates will be 6% by late 2020. 

If you need to refinance large unsecured debt or are planning to move lenders to obtain a better rate, declining house prices will affect your ability to do so based on a max lending amount of 80% loan to value and the ability to qualify.

Understanding the risks of rising interest rates are imperative to weathering the storm in a higher interest rate environment. Speak to me today about steps you can take to save more money in the  long term while avoiding payment shock. 

Want to know what you should do? Have looming debt you would like to consolidate? Needing to find a way into the real estate market?

Call my office today for a private consultation.

Sarah Colucci
Mortgage Agent Lic. M14000929
Direct: 647-773-4849