Oh the shock and disgust as my clients realized to their horror the size of their penalty! You see they were breaking their mortgage mid-term. What their bank didn’t emphasized nearly enough on signing three years ago were the consequences of their obligation if life happened. Herein lies the ugly reality of the Early Mortgage Penalty. I can help you avoid the same…read on!
Toronto Interest Rates Aren’t Everything
I get a lot of phone calls these days that go something like this: “What is your best interest rate for a five year fixed mortgage?” Sounds like a valid question. And yet there is so much more than meets the eye. Although the interest rate you secure for your mortgage is important – I won’t hesitate to be the one to break it to you that your interest rate isn’t everything. The contract you sign (that may or may not be explained thoroughly) has far reaching and potentially expensive ramifications if someone with expertise doesn’t ask you some very pointed questions. Questions like:
- Do you plan on starting a family in the next two years? (outgrowing the home you are purchasing)
- Does your career plan have potential for a location change? Do you work in a field that career progression requires geographic flexibility? (moving to a new city)
- Does your income have the chance to vary greatly from year to year? (having to downsize to a smaller home)
Although not an exhaustive list – the information a client presents to me in discovery will illicit pointed questions to help influence what type of mortgage we secure. This includes thinking ahead to the potential Early Mortgage Penalty you will pay if you have to break mid-term. I wrote more about all of the bank posted rate traps if you want a deep dive into learning more.
Fixed VS Variable Penalties
There are two different ways a penalty is calculated when you break your mortgage mid term (generally speaking).
The first is when you sign up for a fixed rate mortgage. The way each bank calculates the Early Mortgage Penalty varies and their language is confusing (not gonna lie it’s on purpose) however here is in layman’s terms how it affects you:
- You have a 300K mortgage remaining with two years left in your five year fixed rate mortgage and you want to break it.
- The bank calculates the closest term to yours and looks at their interest rate for the same remaining term.
- They take your interest rate at time of signing and compare it to what they can lend out your 300K to the next guy.
- If there is a deficit or they are losing money (3.49% on signing and 2.99% today or -0.5%) you will pay the difference over the 24 months remaining
- If there is a benefit to the bank to lending out your money at a higher interest rate – you will pay the three month interest penalty and be on your way
The second way is how the bank calculates your penalty for a variable rate mortgage:
- Typically you are faced with a standard three month interest penalty
Important Caution For Toronto Bank Mortgage Holders
The banks don’t play fair when it comes to the fine print in your mortgage contract. Like when you are taking your mortgage based on a discount off of the bank’s posted rate. The bank will advise you when you go to break the mortgage – the penalty is not discounted. This is a huge disparity and creates artificially high penalties to break a mortgage early. It’s buyer beware as for the most part the bank does not feel the need to disclose this upfront.
As a value added service to all my present and future clients – I perform a complementary contract review and as part of your New Year’s financial resolutions – there is no better way to get your largest financial obligation in order than to dust off your contract and see what benefits there are in doing some mortgage planning before changes present themselves. Contact me or fill out the form below and let’s get get some light shed on your situation!