Client after client, time after time I hear the same thing…”I had no clue how much it was going to cost to break my mortgage when I sell my home”
Here’s a mortgage fact that I bet you didn’t know. 6 out of 10 people will break their mortgage 3 years into a 5-year term. That’s 60%! This is why some Banks do not tell you about the penalty to break a Bank fixed rate mortgage.
One break’s their mortgage for many reasons. The most common include:
· Sale and purchase of a new home *without a portable mortgage
· Equity take out/refinance
· A Divorce
· Health issues or life circumstances change
What happens if one of the above happens to you, and you need to break your mortgage? Take this for example:
Dan and Kath have lived in their townhouse for just over 2 years now. When they initially bought, they knew the home would need some major renovations, but they were in love with the location and the layout of the home. They purchased it for $400,000, have 3 years left in their term, and would now like to refinance the property to afford the home renos. So, what are Kath and Dan’s cost to do so? Two methods are used to calculate the penalty they’d face:
POSTED RATE METHOD (used by major banks and some credit unions)
The Bank of Canada 5 year posted rate is used to calculate the penalty for Kath and Dan. Under this method, let’s assume that they were given a 2% discount at their bank thus giving us these numbers:
Bank of Canada Posted Rate for 5-year term: 5.34%
Bank Discount given: 2% (estimated amount given*)
Contract Rate: 3.34%
Exiting at the 2-year mark leaves 3 years left. For a 3-year term, the lenders posted rate. 3 year posted rate=3.44% less your discount of 2% gives you 1.44% From there, the interest rate differential is calculated.
Contract Rate: 3.34%
(-) 3-year term rate MINUS discount given: 1.45%
(=) IRD Difference = 1.89%
(*) that by 3 years (remaining term)
5.67% of your mortgage balance remaining. = 5.7%
For Kath and Dan’s $300,000 mortgage, their penalty is $17,100. GOD DAMN!
Luckily Kath and Dan let their Mortgage Broker know their future renovation plans, and therefore they chose a Monoline lender (exclusive through Broker’s). Because of this, and what ended up saving them a ton of money, a different method is used.
PUBLISHED RATE METHOD (used by broker/monoline lenders and most credit unions)
This method uses the lender published rates, which are generally much more in tune with what you will see on lender websites (and are generally much more reasonable). Here is the breakdown using this method:
Rate when you initially signed: 3.24%
Published Rate: 3.54%
Time left on contract: 3 years
To calculate the IRD on the remaining term left in the mortgage, the broker would do as follows:
Rate when you initially signed: 3.24%
LESS Published Rate: 3.54%
=0.30% IRD
MULTIPLE that by 3 years (term remaining)
0.90% of your mortgage balance
That would mean that Kath and Dan would have a penalty of $2,700 on their $300,000 mortgage. That’s better eh?!
Please keep in mind that with the above example is one that works only if the borrower has:
· Solid credit
· Documented income
· Normal residential type property
· Fixed rate mortgage
For Variable rates mortgages, generally the penalty will be 3 months worth of interest (no IRD applies) which is roughly 1.5 times your monthlu payment.
If you’re reading this, and can relate, or if you need to get out of your mortgage early, shoot me a call, text or email. In the example above, it saved those two lovebirds $12,600 to work with someone like me.