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Paying Off Your Toronto Mortgage Early – Fixed VS Variable Penalties

Wednesday, 07 February 2018 / Published in General, Home Purchase Loans, Mortgage Industry News, My Top Articles, Uncategorized

Paying Off Your Toronto Mortgage Early – Fixed VS Variable Penalties

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!

 

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About Michael

I'm here to help you with all your mortgage needs or to simply answer your mortgage questions. My name is Michael Smele and I'm a Mortgage Agent helping clients in Barrie, Newmarket, Innisfil, and Bradford as well as Brampton, Mississauga, Toronto and the entire GTA and across Ontario. Please fill out this form or call me at: (416) 949-5971 or text me at: (705) 481-1688. I look forward to hearing from you and helping you with your needs!

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Call me at: (416) 949-5971


Text me at: (705) 481-1688

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Mortgage License: M08005420
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Real Mortgage Associates, 207-132 Commerce Park Drive, Barrie, ON L4N 0Z7
Real Mortgage Associates, 578 Upper James St, Hamilton, ON L9C 2Y6

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© 2018 Mortgage Truth by Mike Smele. Mike is a Mortgage Agent helping clients in Barrie, Newmarket, Innisfil, Bradford, Brampton, Mississauga as well as Toronto and the entire GTA with home equity loans, home purchase loans, debt consolidation, mortgage refinance, private mortgage loans.

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