Sarah A. Colucci, York Region's Mortgage Expert. Savings Guaranteed.
  • Home
  • WHY USE SARAH FOR YOUR NEXT MORTGAGE
  • APPLY ONLINE
  • PRODUCTS
    • Free House Value Tracker Report
    • CASH-BACK MORTGAGE
    • BRIDGE FUNDS
    • REVERSE MORTGAGES
    • SELF-EMPLOYED MORTGAGES
    • FIRST-TIME HOME BUYER PRE-APPROVALS >
      • FIRST-TIME HOME BUYER TAX CREDIT
    • MORTGAGE REFINANCE >
      • Prepayment penalties
    • SPOUSAL BUYOUTS
    • INVESTMENT PROPERTIES AND RENTALS
    • BRUISED CREDIT
    • PRE-APPROVALS
    • NEWCOMERS
    • DEBT CONSOLIDATION
    • HOME EQUITY LINE OF CREDIT
    • PURCHASE PLUS IMPROVEMENT PROGRAM
    • WHY INVEST IN REAL ESTATE
    • MORTGAGE RENEWALS >
      • New Mortgage Rules and Mortgage Renewals
    • SECOND MORTGAGE LOANS
    • LESS THAN 20% PROPERTIES
    • DOWN PAYMENT
  • CONTACT ME
  • PRIME RATE CANADA
  • CLOSING COSTS
  • DOCUMENTS REQUIRED FOR MORTGAGE FINANCING
  • MORTGAGE DICTIONARY
  • MORTGAGE NEWS
  • GOVERNMENT MORTGAGE RULES
  • MORTGAGE TIPS
  • HOUSE HUNTING CHECKLIST
  • APPRAISALS
  • FIXED OR VARIABLE RATE?

Sarah Colucci's Mortgage Blog

Stay enlightened about mortgage & real estate news in Canada.
Mortgage News 2022

Mortgage Penalties: How to choose a lender that doesn‘t cost so much.

1/4/2019

0 Comments

 
Picture
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
​

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. 

0 Comments



Leave a Reply.

    Picture

    By: Sarah Colucci

    Senior Mortgage Agent, Lic. M14000929

    Archives

    January 2023
    October 2022
    September 2022
    July 2022
    June 2022
    May 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    August 2021
    July 2021
    June 2021
    May 2021
    February 2021
    December 2020
    November 2020
    October 2020
    September 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    February 2019
    January 2019
    December 2018
    August 2018
    May 2018
    April 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017

    Categories

    All

    RSS Feed

GET IN TOUCH WITH US

Let's get started today.



Address

411 Queen St. 
Newmarket, ON
​L3Y 2G9

Sarah A. Colucci, Mortgage Agent Lic. M14000929
Sherwood Mortgage Group
Licence # 12176

Telephone

Direct: 647-773-4849
​
Email: scolucci@sherwoodmortgagegroup.com
Picture
  • Home
  • WHY USE SARAH FOR YOUR NEXT MORTGAGE
  • APPLY ONLINE
  • PRODUCTS
    • Free House Value Tracker Report
    • CASH-BACK MORTGAGE
    • BRIDGE FUNDS
    • REVERSE MORTGAGES
    • SELF-EMPLOYED MORTGAGES
    • FIRST-TIME HOME BUYER PRE-APPROVALS >
      • FIRST-TIME HOME BUYER TAX CREDIT
    • MORTGAGE REFINANCE >
      • Prepayment penalties
    • SPOUSAL BUYOUTS
    • INVESTMENT PROPERTIES AND RENTALS
    • BRUISED CREDIT
    • PRE-APPROVALS
    • NEWCOMERS
    • DEBT CONSOLIDATION
    • HOME EQUITY LINE OF CREDIT
    • PURCHASE PLUS IMPROVEMENT PROGRAM
    • WHY INVEST IN REAL ESTATE
    • MORTGAGE RENEWALS >
      • New Mortgage Rules and Mortgage Renewals
    • SECOND MORTGAGE LOANS
    • LESS THAN 20% PROPERTIES
    • DOWN PAYMENT
  • CONTACT ME
  • PRIME RATE CANADA
  • CLOSING COSTS
  • DOCUMENTS REQUIRED FOR MORTGAGE FINANCING
  • MORTGAGE DICTIONARY
  • MORTGAGE NEWS
  • GOVERNMENT MORTGAGE RULES
  • MORTGAGE TIPS
  • HOUSE HUNTING CHECKLIST
  • APPRAISALS
  • FIXED OR VARIABLE RATE?