We always focus on the Terms and Conditions of the mortgage. Most people have no idea what the bank is talking about when they sign the mortgage. We DO as we do this every day.
Here is a link from a Canadian Law website about a CLASS ACTION LAW SUIT against CIBC for calculating their payout penalties incorrectly: https://canliiconnects.org/en/commentaries/66074
My favorite part of the article is here:
“difficulty of enforcing fairness to consumers … there is a serious imbalance of bargaining power between the oligopolistic banks and individual borrowers. Legislative action to provide better consumer protection would be desirable.”
And here is a link to a guy that was almost our customer but stayed at his bank because they matched our broker rate. And now he is paying a $35,000.00 payout penalty because of it.
Below is a great article about why paying the payout penalty can be worth it for you. We always do the math for you to ensure that it is a better deal AND we also include any other costs in that math – like an appraisal and legal costs – lots of other brokers do not. Ensure ALL the costs are included in the math before making the change.
Want to ensure it is worth it – give us a call for a free 5-minute mortgage checkup at 403-681-4376.
Tara Walton/Toronto Star By Bryan Borzykowski |
Last September, my wife and I started scouring the city for a new house. We were living in a cozy bungalow, but with a growing kid and another on the way, we decided it was time to move.
Buying a new house is, of course, expensive, so I wanted to do whatever it took to reduce my costs. Most of the fees couldn’t be avoided, but there was one costly payment I desperately wanted to steer clear from: The mortgage penalty charge.
I had just over 12 months left on my five-year mortgage term, which meant that I either had to break my mortgage or stay with my current lender by transferring my mortgage to my new house. The latter option would have allowed me to avoid the fee. However, my lender couldn’t give me the best interest rate.
The new lender, a bank, was offering a variable rate of 2.25 per cent, a much lower rate than my old lender was willing to offer. I calculated that over the term I’d be better off paying the fee and taking the lower rate.
It was going to cost me $10,000 to break my contract. It felt like an unnecessary cost — I paid my lender so much in interest over the four years, why would I have to cough up so much cash?
I asked my broker to see if the lender would waive the fee, even though I was using a new lender for my next house, but they didn’t. Peter Veselinovich, vice-president of banking and mortgage operations at Investors Group, isn’t surprised. “The charge isn’t negotiable,” he says.
While the penalty may seem like an arbitrary sum, it’s not a cash-grab, he says.
The lender takes mortgage funds from money invested in GICs and other products and then it pays investors interest on those investments.
The idea is to match a five-year mortgage with a five-year GIC, so investors can get paid back at the same time as the mortgage comes due.
If a mortgage is broken, the lender needs to come up with money to fill the gap between the investment coming due and the mortgage ending. Hence the fee. The lender then takes that lump sum and invests it, so it can pay investors back when its GIC comes due.
The penalty is calculated two ways: you either pay 90 days of interest or what’s called an interest-rate differential, which is a penalty based on your old rate and a new rate based on a shorter term.
For example, let’s say you wanted to exit your 5 per cent five-year term with three years left to go. The lender would look at the current three-year term rate, which, say, is 3 per cent, and then charge you interest on the difference, 2 per cent, for 36 months. The sum also depends on how much money you still owe the bank.
However it’s calculated, the payment can be huge.
Darick Battaglia, a mortgage broker and owner of Dominion Lending Centres’ Barrie location, says that while it may seem as though people have to empty their bank account to pay the penalty, ultimately, by paying the lower rate, they’re getting that money back in mortgage savings.
Whether you’re moving houses, or just want to break a mortgage to take advantage of a lower interest rate, people often pay the penalty so they can free up more disposable income.
“It can help people get into a better financial position, because they have more disposable income,” says Battaglia. “They may find that it’s better to invest that money in an RRSP.”
If you’re moving, there are strategies to help reduce the penalty or even not pay it at all.
Almost all mortgages allow people to put a certain percentage of money down on a house every year; I was allowed to pay 20 per cent of my balance every 12 months.
In some cases, lenders will allow you to designate the first 20 per cent — it could be less or more depending on your lender — of the proceeds of a sale of a house towards the prepayment in order to pay down the outstanding balance and so reduce the mortgage penalty.
Battaglia has dealt with many lenders who refuse to honor this type of arrangement. They want two checks: one for the prepayment and one to pay off the mortgage.
My own lender refused to let me make one payment; I had to borrow money from my broker, who paid my prepayment three days before closing. I had to pay him back with some of the proceeds of the sale. It was a major hassle. But I did save about $1,500.
Porting a mortgage to a new house is another way to avoid the fee.
Let’s say you have $100,000 left on a mortgage with a 4 per cent rate, but you need $200,000 more for the new house. The bank will give you the additional money at the new rate, which could be 3 per cent. You’d keep the same term or extend it and now you’d pay a blended rate, in this case 3.5 per cent on $300,000.
“There are no penalty costs, because you’re still honouring the original contract,” says Veselinovich.
Most people will have to open their wallet when they break a mortgage.
While I did get my penalty reduced by making a prepayment before closing, I still had to write a cheque for about $8,000. It was painful at the time, but now that I’m in my new house, paying a new mortgage at a much lower rate, I don’t think about the penalty anymore.