Mortgage Penalties

This is very important to consider before you finalize your lender. You will end up paying a huge amount of penalty in case you get into a situation where you need to break the mortgage.

Why break your Mortgage? – You probably are not planning to break the mortgage at the time you sign for a mortgage. But as per the statistics, most of the people will refinance or change their mortgage every 3 years. Some of the common reasons to break the mortgage include financial hardship, divorce, relocating and taking advantage of lower rates.

How does mortgage penalty work? – Mortgage penalties are different depending on whether you have a variable or fixed mortgage.

With variable rate mortgage your mortgage penalty is often simply 3 month’s interest.

With a fixed rate mortgage, your penalty is usually the greater of 3 month’s interest and the Interest Rate Differential (IRD). Often times you end up paying a lot more. The IRD is a formula that takes into account the money lenders potentially lose when you break your mortgage.

The IRD formula is used to calculate what you are currently borrowing at and what the bank can re-lend it out at. The bigger the difference in the rates the higher the penalty would be. The bigger banks use the posted rate and not your actual rate to calculate the IRD which results in much higher penalties. For example, current posted rates for a 5 years term is 4.64% and actual rates are around 2.64%, so you are getting a discount of 2%. When they calculate the penalty, they use the higher posted rate (4.64%) for the interest difference for the remainder of the term and not your actual rate (2.64%). We look to place your mortgage with banks that use your actual rate.

You can avoid paying the penalty by porting (transferring) your mortgage to your new property or by doing a “Blend to Term” or a “Blend and Extend”. A blend keeps your existing rate on your mortgage and blends with the current rates to give you a new rate for the remaining term of your existing mortgage or into a new mortgage term. All a blend does is ensures the bank gets the rest of interest for the remaining term.

Serving the Greater Toronto Area in Canada

The GTA, including Toronto, Etobicoke, Mississauga, Streetsville, Oakville, Burlington, Milton, Hamilton, Ancaster, Georgetown, Brampton, Markham, Vaughn, Cambridge, Waterloo, Kitchener, Stoney Creek, Grimsby, Welland, St Catharines and Niagara Falls.

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