Many banks offer tempting rates these days, but to get a good deal it really pays to read the small print. Without taking the right precautions and doing the necessary research, you can end up with an unexpected penalty, like this couple did. Read the blog below to find out more.
One of the real dangers for those who are looking for a new rate is the mortgage penalty pitfall. While a bank can offer an enticing rate that can work great for the time you need it, the moment you decide to break your mortgage you can be in trouble.
What Is A Mortgage Penalty?
A mortgage penalty is a financial payment you must make at the time you break your mortgage to compensate the lender for the business and interest payments they will lose. However, in reality the final figure you end up paying can often turns out to cover far more than this. The problem is that banks can calculate this penalty in a variety of ways and so before you sign off on that low rate, it is essential that you know what you’re getting yourself into.
How Are Mortgage Penalties Calculated?
There are a couple of ways that mortgage penalties may be calculated. One of the common ways banks calculate this figure is by using posted rates instead of discounted rates, and this should be an alarm signal when comparing fixed-rate mortgage offers. While variable-rate mortgages generally only penalize three months’ rent, fixed-rate mortgages are more complicated. Lenders have the option of either charging three months’ rent, or something called Interest Rate Differential (IRD). IRD is complex calculation that can use either discounted rates or posted rates, and if it uses the latter then you can be setting yourself up for huge penalty further down the line. The mortgage penalty policy of each lender can vary and so it is crucial that you fully understand the financial consequences of breaking your mortgage.
If I’m Not Planning on Breaking My Mortgage, Do I Need To Worry?
The short answers is, yes! It may seem unlikely that you’ll ever want to break your mortgage but you can never predict the future. According to mortgage broker Robert McLister, 70% of those with five year fixed-rate mortgages adjust their agreement at some point before its maturity and even though many do so to refinance or upscale, it still shows the importance of keeping your options open. Just because you’ve found the perfect house it doesn’t mean you should leave yourself vulnerable to big penalties in the future.
Bottom Line: The enticing fixed-rates being offered by banks nowadays may appear like a good deal, but before you sign on the dotted line it’s essential that you find out how the rate deals with mortgage penalties. Even if you are sure you won’t need to break your mortgage you should still find out what the terms and conditions are just in case. Signing a mortgage deal without evaluating your options for breaking your mortgage is simply not worth the risk, no matter what you situation is.
For more information on mortgage rates, mortgage penalties and more, contact Tim Lacroix in Calgary today on (403) 648-1541.
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