Payout penalties – how the Big-5 banks get you
Below is a great example of how the Big-5 banks get you on a mortgage payout.
Always talk to a broker about your mortgage because Grandma used to say, “the rate is the rate, but the details are the details!”
Mark Herman
Top Alberta mortgage broker for home purchases and mortgage renewals
As you can see from the example below, the banks “discount rate recapture policy” can result in some pretty hefty added costs —$6,048 in the scenario here!
Example:
On July 31, 2011, you buy your first home and sign a five-year, fixed-term mortgage. As your family grows, you start looking at a bigger home, and after a few months of searching, you find the perfect one—on August 1, 2013.
Because of this unexpected upgrade, you now have to break your mortgage three years before it matures (you have $320,000 left on your mortgage). When you signed your current mortgage, you weren’t concerned about prepayment penalties, but as you can see below, prepayment penalties can have a significant financial impact on your bottom line.
| Your situation | |
|---|---|
| Mortgage date | July 21, 2011 |
| Date you break your mortgage | August 1, 2013 |
| How much you have left owing on your mortgage | $320, 000 |
| Your original mortgage term | 5 years |
| How many years left you have on your term | 3 years |
| Comparison | ||
|---|---|---|
| Mortgage breakage fee at the Big-5 banks | Mortgage breakage fee with Broker Banks |
|
| 5-year posted rate when you got your mortgage | 5.39% | Not applicable for the IRD calculation |
| Your actual contract rate | 4.00% | 4.00% |
| Discount | 1.39% | N/A |
| 3-year posted rate on August 1, 2013 (the day you break your mortgage) | 3.75% | 2.99% |
| IRD formula | (Contract rate – [Posted rate for remaining term – Discount from original mortgage]) x Principal outstanding x Remaining term | (Contract rate – Posted rate for remaining term) x Principal outstanding x Remaining term |
| IRD payment | $15,744 | $9,696 |
| Difference in fees | $6,048 | |
For a free mortgage check-up, or pre-approval, or compare what we can do vs. your bank, call Mark at 403-681-4376
• There is no cost to you for our services as the banks pay us for doing their work,
• You get our professional, un-biased advice & expertise on your mortgage,
• We answer our phones and emails, 7 days a week, from 9 – 9, including holidays,
• Your rate will be lower with us as we deal through “broker services” at the banks.