Payout Penalties: Nasty tricks of the Big-6 Banks – Example 1

Payout penalties – how the Big-6 banks get you, Example 1

Below is a great example of how the Big-6 banks get you on an early mortgage payout.

“The rate is the rate, but the details are the details!” said Grandma Herman.

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, 2015, 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, 2017.

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, 2015
Date you break your mortgage August 1, 2017
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

 Remember, when working with us:
• 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 is lower with us as we deal through “broker services” at the banks.

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