When you first buy a house, it may seem odd to immediately consider the penalties involved with breaking the mortgage. However, approximately 70% of people with 5-year fixed mortgages make premature adjustments. Whether it’s to refinance or because they need to move to a larger home, most borrowers break their mortgages before maturity and face confusing and expensive penalties.
One of the main issues with Interest Rate Differentials (IRDs) or penalties is determining the exact cost a borrower is responsible for to adjust their mortgage. In the past, lenders made it exceedingly difficult to interpret penalty charges and borrowers were completely blindsided by the cost. Recently, changes have been implemented with lenders where they are required to post penalty charges in clear, plain text and provide online calculators to determine the cost.
This initiative has been extremely beneficial for mortgage owners, but there are still some hidden issues that may arise and affect your penalty cost. For instance, discounts received at the time of your mortgage approval may greatly impact your penalty and the online calculator wouldn’t account for this provision. Here are some other questions everyone should ask their lender before mortgage adjustments are needed:
- What Is my fixed-rate mortgage penalty based on? Posted rates, bond yields or discounted rates? This determination will indicate how banks base their penalties and what you’ll be facing.
- What benefits do I have if I break my mortgage, but keep you as my lender? Are there any penalty discounts associated? The competitive market today forces lenders to have incentives for borrower retention so try to take advantage of that.
- What term is used to calculate the comparison rate for penalties? Depending on your lender, they may use a shorter-term rate instead of a nearest term and this can largely impact the cost. For example: If you have 22 months remaining on your mortgage, many lenders will utilize a posted rate reflecting a 2-year term as the comparison rate. (Lenders may round up or down to) The lower your comparison rate is, the higher your IRD penalty is. The timing of your penalty can affect your cost so talk to your Mortgage Broker about your options.
- Can I increase my mortgage payment without taking a penalty? This is good to know if you need to upgrade your house or want to pay off your house quicker.
- Can I opt out of my fixed mortgage early if I pay all penalties? Some mortgages do not have an “out” feature whatsoever, unless you sell your home so this is good to know upfront.
- How long do you honour penalty quotes? If you are currently in a fixed mortgage, but interest rates are dropping and you want to take advantage of them, it’s important to know how long your quote is valid so that you’re aware of the total penalty cost.
It’s a very common practice to adjust mortgages and with new policies in place and it’s becoming easier to decipher the associated costs. If you need any help or additional clarification with mortgage penalties, give me a call at 403.648.1541 and I’ll be happy to help.