When signing up for a mortgage, Barrie home owners rarely analyze the costs involved in breaking a mortgage before the end of the term. Many think, “Why would I need to break my mortgage?” Well there is a lot that can happen over a 5 year term. Most don’t want to image the scenario of job loss, health issues or separation, but these are real issues that can sneak up on anyone.
All mortgage are not measured equal when it comes to penalties. Most of the banks first show their clients an imaginary rate from their “posted rate” list, to help illustrate how much of a discount they are offering you. Most Barrie home owners assume that will be the last time the lender will throw that number in their face, but they’d be wrong. If you find yourself in the unfortunate situation where life requires you to break your mortgage & refinance, the posted rate makes an ugly return. Most banks, when calculating an Interest Rate Differential (IRD) penalty will use their post rate. This means that they will calculate the amount of interest they will lose (for the rest of the term), the difference between what you paid (discounted rate) & the bank’s posted rate can be dramatic. In many cases it can cost you thousands of dollars extra.
This penalty is intended to compensate the lender for lost interest revenue but, in most cases, it vastly overcompensates their deficiency. Consumers are generally unaware that there are many other lenders, in which mortgage broker’s use, that utilize a different formula. In their calculations the borrower only pays an interest penalty on the difference between the rate the Barrie home owner paid and the lender’s current “discounted” rate; an apple to apple comparison.
One way to avoid an IRD penalty is to choose a variable rate mortgage, where the lender generally only requires three months’ interest as a penalty. Going this route can be a good strategy if you know there is a decent chance you’ll break the mortgage & because variable rates are expected to stay low over the foreseeable future.
The moral of the story is be aware of what you’re signing knowing that “all mortgages are not built equal”.
Darren Robinson is an expert Barrie mortgage broker, dedicated to offering the best mortgage strategies and provides personal assistance to help people qualify for difficult mortgages and loans. Call 705.737.6161