Research shows most mortgage borrowers search for the best interest rate but hardly ever read through the terms of their mortgage contract which can end up costing them more money down the road.
In the last few years prepayment penalties have received a lot of attention.
For example, in 2014, the CBC released an article exposing a penalty a couple had to pay in the amount of $17,000 when they decided to sell their home and move abroad. TD eventually softened the blow but it’s wasn’t until after the couple went public.
A class action law suit was also launched against CIBC in 2011 by Siskinds LLP after a number of borrowers claimed “that CIBC applied terms and conditions to certain mortgage contracts to allow it unfettered discretion for calculation of mortgage prepayment penalties.” Some people were forced to pay over $50,000 in penalties.
Royal Bank was also in the spotlight in 2011 when Brian Hyytiainen went public about his penalty that cost him $13,000. He later appealed the penalty to the RBC ombudsman and Chambers Banking Ombuds Office. According to the article published by the Toronto Star, his request for a reduction of this amount was declined.
If you’ve noticed a pattern of higher penalties amongst big banks, you’re on to something.
Big banks have the highest and most expensive penalties due to their calculation method. In a fixed rate mortgage, which is the most popular type of mortgage borrowers obtain, big banks use the Bank of Canada’s benchmark rate to calculate penalties. These rates are often highly inflated and can give the impression borrowers received a bigger discount off of their interest rate than they really did. In turn, this triggers a larger penalty.
Is it any wonder that big banks make millions, if not billions of dollars from pre-payment penalties? It shouldn’t be. Mortgage contacts are designed to make lenders money and big banks will use every avenue they can to generate a profit.
In conclusion, if borrowers don’t understand what they are reading and most importantly, signing, they won’t be able to protect themselves from bad terms which can be costly.
As an experienced mortgage agent who prides herself on facilitating clients with the right mortgage for their lifestyle, I don’t like to focus on interest rates as much as I do mortgage terms.
I occasionally come across borrowers looking for the best pricing only but the bulk of my clients come to me for advise and the best mortgage which means more than just the interest rate.
If borrowers rate shop they may get the lowest rate but may also be stuck in a punitive mortgage contract, one that has “no frills.” Prepayment privileges, penalty calculations and more may be all skewed to be astronomically more expensive in exchange for a better rate. Not many borrowers want this type of mortgage if it’s explained to them in detail.
To learn more, you can always contact me at (647) 773-4849. I am always willing to either advise on a particular mortgage or even help borrowers read the fine print of their existing mortgage contracts.
The Office of the Superintendent of Financial Institutions has released a mandate to banks to require a 2% buffer against bad loans.
OTTAWA ─ June 4, 2019 ─ Office of the Superintendent of Financial Institutions
Today the Office of the Superintendent of Financial Institutions (OSFI) set the Domestic Stability Buffer at 2.00% of total risk-weighted assets, effective October 31, 2019.
This reflects OSFI’s view that key vulnerabilities to Canada’s Domestic Systemically Important Banks (D-SIBs) remain elevated. The key vulnerabilities include Canadian household indebtedness, asset imbalances and institutional indebtedness. Against this backdrop, a favourable credit environment and stable economic conditions continue to provide a window of opportunity for D-SIBs to increase their capital holdings.
An effective capital regime ensures that banks are holding adequate capital to protect against risks to the financial system, while also encouraging them to use their buffers during times of stress to avoid asset-sales or drastic reductions in lending.
This announcement is consistent with the Financial Stability Board remarks that financial supervisors like OSFI should “consider using the current window of opportunity to build resilience, particularly macroprudential buffers where appropriate.”
Announcing the buffer demonstrates OSFI’s view that increased transparency will support banks’ ability to use this capital buffer in times of stress by increasing understanding of the purpose of the buffer and how it should be used.
" Building Resilience: OSFI Sets Domestic Stability Buffer Level At 2.00% ". 2019. Osfi-Bsif.Gc.Ca. Accessed June 5 2019. http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/Pages/dsb201906-nr.aspx.
Q & A with Sarah Colucci
Why do homeowners refinance?
Homeowners often choose to refinance their mortgage for various reasons including consolidating high interest debt, taking out equity in their home, investing in real estate or completing home renovations.
Is refinancing common?
Yes, it is. In fact, as many as one out of three homeowners will refinance their existing mortgage before it has matured.
Is it true that borrowers will have to pay a penalty to refinance?
To refinance, your existing mortgage must be broken or “blended and extended”, which I can also explain.
To break your mortgage early will trigger a prepayment penalty. If you have a variable rate mortgage, usually the penalty amounts to three months worth of mortgage interest. If you currently have a fixed rate mortgage, you will be charged either three months worth of interest OR the Interest Rate Differential, whichever is greater.
Depending on how your current financial institution calculates prepayment penalties, the payment may be reasonable or very expensive. As mortgage brokers, we can help you sort through your prepayment penalty to ensure you understand the numbers calculated by your current mortgage holder.
If I had a lot of credit cards, for example, and wanted to consolidate debt, how could I figure out if I should refinance or not?
That’s a really good question. Because refinancing your mortgage means breaking your mortgage contract in most cases, some people may think it’s too expensive. Once you consider legal fees and appraisal costs plus the penalty, it may seem as though refinancing is not the answer.
However, each case is very different. If your someone who has a few credit cards at 19.999% interest, for example, and a monthly payment that is just interest, consolidating makes sense when you consider how much interest you will pay in just a year. Some people forget that credit cards were designed to keep borrowers in debt forever, and many people, unfortunately, fall into this trap.
Consolidating also can help people recover necessary cash flow each month which can help them “breathe.” Most people live pay cheque to pay cheque so it’s important that my clients are set up to have the additional funds to maintain liquidity in the bank and pursue other, more lucrative investments.
Refinancing at my office is usually part of a bigger strategy for the client. My goal is to help borrowers reduce their total mortgage balance and interest payment every month.
Is it true that big banks like Royal Bank and CIBC, for example, have the most expensive pre-payment penalties?
They can be, yes. Big banks use the Bank of Canada’s posted rates to calculate their penalties. When calculating the interest rate differential which I explained before, this can seem as though the client got a bigger discount off their mortgage rate than they actually did. This, in turn, triggers a larger penalty.
You mentioned “blend and extend” - what does this mean?
Sometimes, if a client can stay with the same financial institution, as in they still qualify with them, I can mitigate a penalty by keeping them with their bank. In this case, they avoid paying a penalty because instead of breaking the mortgage, they just increase the principal amount and blend their old rate with the new rate on the percentage of new money they are asking for.
How can people get in touch with you?
Usually, I am available through social media direct messaging such as Facebook or Instagram and of course email at email@example.com. To speak directly, borrowers can call me at (647) 773-4849.
By: Greg Thomas, Financial Planner
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.
The Canadian Government has indicated that it wants to make home ownership more affordable for first-time buyers. All of this after being pressured by big banks who are losing money they can't lend and a fair portion of the next generation of the middle class that can't seem to get in on a piece of the real estate market.
Perhaps the next course of action will be that they change the maximum amortization on high-ratio mortgages to 30 years instead of the current 25 years. But do this 'help' first-time home buyers or those who have less than 20% down?
This article from Better Dwelling argues that increasing the amortization does NOT, in fact, make home ownership more affordable. When you do the math, increasing the amortization simply means more interest payments and substantially more debt since the loan is now set out over 30 years as opposed to 25. Ideally, in any mortgage, we want to move to shorten the amortization so we pay less interest.
When it comes to affordability, what increasing the amortization does do is make monthly payments smaller which makes the cost of living easier - BUT this is not to be confused with more affordable.
In reality, what the Government banks on (no pun intended) is the probability of borrowers not questioning the logistics of their policies, and that they will only be enticed by the monthly payment, therefore, inadvertently taking on massive debt to help 'fix' the eliteness system of obtaining profits.
In my opinion, in an effort to help first-time buyers, right now, the stress-test should be eradicated and people should focus on reducing and eliminating their unsecured debt and other fruitless monthly obligations.
There has been absolutely no change to the Bank of Canada's overnight lending rate, and as a result of an extremely uncertain outlook on not only the Canadian economy itself but the global economy as well, major banks are cutting their interest rates.
Yesterday, Royal Bank of Canada was the very first bank to cut it's five-year fixed rate 10 basis points from 3.89% to 3.79%. Here at the broker channel, interest rates have also been reduced by various lenders all across the board.
This is great news for mortgage borrowers who have been anxious about rapidly increasing mortgage payments on a variable rate mortgage or for those who have mortgages coming up for renewal.
Any other variable rate credit products will also maintain the same payment assuring borrowers that payments will stay manageable for the short foreseeable future.
What's causing the sudden change of heart by the Bank of Canada?
Just a couple of months ago we were hearing that 2019 was the year for rate increases. But last week, the Bank of Canada took a sharp turn and held the overnight lending rate at 1.75% signaling that the economy is not as strong as they thought it was.
So you know, the Bank of Canada's job is to maintain stable pricing and low inflation. And, much of the decision with respect to the overnight rate is based on oil and global uncertainty as well as turmoil in Canada itself (transportation issues surrounding getting oil out of the country is causing a surplus).
Perhaps the wonderful economy is not as strong as expected and the Bank of Canada needs to revise how they are looking at things going forward?
Additionally, the US Fed has also changed their tune largely because global growth is not as strong as they hoped such as tariffs being one hurdle they are approaching.
And then there's the 'yield curve' that is flattening aggressively and this tends to signal a recession is on the horizon. Some economists also suggest 2020 is just around the corner and may be a recession year.
For all of your mortgage needs, feel free to contact our office today.
Direct: (647) 773-4849
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 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 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:
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 Interest Rate:2.990%
Rate discount received:1.850%
including cash back:$6,675.84
With a monoline lender (First National Financial LP)
(Example of calculation below)
Your estimated prepayment charge is
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
Sarah A. Colucci
I have over a decade of mortgage experience. I am passionate about helping my clients obtain the best mortgage and getting out debt as soon as possible.
Helping you understand shortcuts.
There are tricks a borrower can use to pay off their mortgage faster, paying less interest to the banks.
I'd like to show you an example using "Sue."
Sue currently has an outstanding mortgage balance of $100,000 on her property. The mortgage interest rate is 4%, which costs her approximately $4,000 a year in interest.
According to a recent appraisal, her property is worth $850,000, and therefore, she has a mortgage of 12% of the loan to value.
Since the bank will give her up to 80% of the loan to value, or up to $680,000 (if she qualifies), Sue takes out a line of credit for $100,000 to match what she has outstanding on the first mortgage.
Now her property is mortgaged for $200,000 or 24% of the loan to value.
Instead of using the money she has taken out on a line of credit for purchases or other purposes, Sue pays off her first mortgage of $100,000 with the line of credit. The $200,000 debt is consolidated into just a line of credit of $100,000.
The line of credit's interest rate is Prime plus 1%, so approximately 5%, interest only, which costs her $1,000 extra a year, or $5,000 in interest.
You may be asking yourself, how is Sue getting ahead with paying more money each year in interest payments?
Sue has some savings sitting in a TFSA account and she's contributing to it with each pay cheque and earning minimal return. Here's a better option:
Sue has a TFSA account that has $20,000 in it. Instead of letting the TFSA collect interest at 1%, she puts it towards her “open” line of credit, meaning she can pay it down without penalty whenever she wants. Now she has a balance of $80,000, and she is paying only $3,000 a year towards interest, which is $1,000 less than she was originally paying on her first mortgage balance.
Therefore, Sue is saving over $700 a year because she would have only earned about $200 in her savings account.
As Sue gets paid, instead of putting some of her savings into a TFSA, she deposits it into the line of credit balance which enables her to pay principle faster due to it being calculated using simple, monthly interest instead of being amortized over twenty-five years or longer.
This sounds great but what are the dangers?
The home equity line of credit‘s interest rate can change. The Bank of Canada sets the overnight lending rate, which does fluctuate. Depending on the rates, this can alter how many savings one acquires and how fast they can pay off the line of credit and become mortgage free.
If the line of credit is not used often, one may be charged inactivity fees.
Most people have good intentions when they apply for a home line of credit. However, if someone finds themselves in debt, they could accumulate a balance on the line of credit, making it difficult to pay off. This would make the HELOC very counterproductive to the goal of becoming mortgage-free sooner.
Need mortgage advice? Depending on your unique situation, there are many options to explore to save you money, helping you become debt-free sooner.
Call today for a free consultation (647) 773-4849.
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.
Mortgage Agent Lic. M14000929