Penalty for Breaking Mortgage

[Joanne]

I am so frustrated with my bank!

My current mortgage was set up Nov 07 for a 5 year fixed term, closed mortgage, the interest rate was discounted. Needless to say rates are much better now! I would like to switch to variable but I am told this invovles a penalty. I know that this is the greater of three months interest or the IRD. I have done my math and have determined that is the three months interest. No problem, I will recoup the penalty in interest savings! BUT, the bank tells me the IRD is much higher than my calculations, in fact it is double the three months interest! This penalty I will never recoup in interest savings, so I have no choice to "extend and blend" blah blah blah...

The IRD is the difference between the existing rate and the rate for the term remaining, multiplied by the principal outstanding and the balance of the term.
They explained to me that the "existing rate" in this calculation is not based on the discounted fixed interest rate I received in Nov 07, but the actual posted rate at that time, of which they have not been able to determine, but yet have no problem throwing the the cost of the IRD in my face.

I have read though my standard charge terms and nowhere in the explanation of the IRD calculation does it mention using the original posted rate and not the discounted rate at the time of the mortgage, it does state to use the fixed interest rate as indicated in the mortgage or approved by me and the bank.

[K.C.]

It sounds like they are trying to scam you. We are looking at breaking our 5 year fixed mortgage too and the penalty works out to about 3 months interest.

In May we blended our existing 5 year mortgage which I think was around 4.9% and withdrew about $65K for Mattamy deposits/upgrades which blended with the posted rate of 7.25% worked out to 5.5%.

Currently our lender is offering us 4.3% (and likely lower rate by closing) on a 5 year fixed. The savings are already there so we intend to break it.

Maybe they're telling you not to break it because then you can introduce competition to this scenario. I'd tell them to start being cooperative or you're going to call your lawyer and then they can compete for your business against other lenders.

[Joanne]

Yes I think they are trying to scam me. Contrary to what they initially told me, I crunched some numbers and even if the IRD penalty is at the amount they suggest, I, in fact will recoup that money and then some in interest savings. I will be calling them back to let them know who is in the driver's seat here!

[K.C.]

Find out who that person's manager is and call them. I once had a problem with the manager at a Bank of Montreal branch and I decided to call the Regional Vice President. I left him one voice mail and all of a sudden everything that was impossible before was possible.

[Joanne]

I just emailed the mortgage specialist with my terms which I expect them to meet without penalty, if not I am off to the competetion. I think lenders rely on the fact that 75% of the population accepts the terms they provided you with without question. Many people don't understand the calculations involved, fortunately I am a math teacher and have a financial calculator at my desk so I can play around with the numbers. There are many online mortgage calculators as well which are somewhat user friendly.

[K.C.]

We've been lucky because we had a great person at London Life taking care of us for the last 13 years. She just retired and the person who took over for her is really green but she's honest and does her best so we plan to stick with them. I've never had to haggle with London Life because they always give us their best rate. When I was building my businesses they were creative in getting things done for us. If you're an entrepreneur most Canadian banks treat you like you have a contagious disease.

[fugee]

The IRD is typically calculated with a term that is closest to the remaining term in your existing mortgage at a posted rate minus the discount you were given.

Other lenders like ING who don't have posted rates will use the difference between your current rate and their closest remaining. For example, if you have been in a mortgage for 1 year and 4 months at 4.99%, they would use the 4 year rate at 4.29% to calculate IRD. If you were at 1 year and 6 months they would use the 3 year rate at 4.75%. In this case, 3 months interest would be the greater of.

Here is the formula to calculate it.


interest rate differential Step 1:
_______ (A) - annual interest rate on your mortgage
_______ (B) - current annual interest rate for a new mortgage with a term that is closest to the remaining term in your existing mortgage (less any discount you received on your existing mortgage)
_______ (C) - A - B = C, which is the difference between your existing interest rate and the current rate
_______ (D) - amount you want to pay off


Step 2:
_______ (E) – number of months left until your mortgage maturity date
_______ (F) - (C x D x E) ÷ 12 = F, estimated interest rate differential amount
_________________

Hope this helps and clarifies. You can't really get around it and though it might feel like a scam, it is the way financial institution protect themselves from clients leaving at any moment.

In my 6 years in the industry I have yet to see lenders waiving the IRD for clients i have refinanced away from their lending institution. To be honest, with you it would not make financial sense for the lender.

[K.C.]

I see ... now it makes sense. We blended in May to get the money for the down payment and upgrades.

[Joanne]

I have determined that the IRD I will pay is based on a discounted rate and is therefore more than I imagined, but I know that I will more than recoup the cost of breaking.:D I have my mortgage broker setting it all up for me now, so I don't have to deal with my bank anymore.:mad: Anyone with a mortgage who is not on a variable rate should look into breaking, or if the fixed rate is lower than your current rate it may be well worth it even if you want to stay with your bank.:)

[K.C.]

We're trying to break our mortgage. The penalty keeps getting higher and higher as the rates get lower. You have to pay the penalty up front with cash ... ouch. It's gone from $4,600 to over $10,000. It will probably go a little higher still. I think it's still worth it though. The difference between what you pay and what you save is almost 3X.

But putting up all that cash up front when you have a gazillion other things to pay for is hard.

[Joanne]

I don't have to pay my penalty in cash it is getting factored into my mortgage because I am switching banks, doing a whole refinance so I am increasing my mortgage by the amount of the penalty. It is still a savings in the longer term, paying interest on the penalty. My current bank has not posted a lower rate yet and I am supposed to close tomorrow, so my penalty is still the same.

[K.C.]

I don't have to pay my penalty in cash it is getting factored into my mortgage because I am switching banks, doing a whole refinance so I am increasing my mortgage by the amount of the penalty. It is still a savings in the longer term, paying interest on the penalty. My current bank has not posted a lower rate yet and I am supposed to close tomorrow, so my penalty is still the same.

That's a good idea. It's unfortunate that we would need to change lenders in order to do that. If I try hard enough I can probably find a lender who will offer me a lower rate for a mortgage with fewer prepayment options. If I'm willing to pay a slightly higher rate I can get them to absorb the penalty. Because my lender hasn't provided me with the lowest rate available it might make sense to leave.

[Joanne]

I have absolutely no loyalty with lenders. I have had my broker shop my mortgage rate nov 07 at renewal time, and now again that the rates have dropped significantly and he will shop again for me when I close with Mattamy in 4 months. He provided me with a open mortgage at this point so when I close with Mattamy I won't have to pay a penalty again and can be locked in for the best 5 year fixed. I plan not to go with a 5 year variable since it is +.08 which will not be so great when the prime rate starts to climb again, which will happen in the next 5 years. Plus the 5 year fixed is at an all time low, though I cannot go with one of those no frills mtgs with little or no prepayment options. I want to pay this baby off ASAP! People who have the prime minus VRIM are sitting pretty right now! I am so jealous!

[K.C.]

I think one of the reasons the penalty is so high is that they realize what a great deal it is for us to break it now. A rate hovering just over 4% for a 5 year fixed is probably the deal of the century especially with the existing prepayment privileges we have. If we weren't going to finish the basement right away I'd say here's your $10K I'm ought of here. I think we'll still break it even if we choose to stay with them unless they can offer us a much better deal for a blend and extend which I don't think they will.

[K.C.]

http://business.theglobeandmail.com/servlet/story/RTGAM.20090304.wreconomy04/BNStory/Business/home?cid=al_gam_mostview

The Bank of Canada hasn't ruled out cutting the overnight target all the way to zero, saying the rate "can be expected to remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken up."

That means rock-bottom borrowing costs for at least a year, said Sébastien Lavoie, an economist at Laurentian Bank of Canada in Montreal.

[babymaeby]

We met with our mortgage advisor yesterday. The same one that was at the Mattamy sales office the day we bought. Because we went with RBC for preapproval when we first signed our APS, we are now eligible for whatever the terms were 14 months ago when we bought.

Which means.....we can sign up for a a VRM for prime -0.75. We are going to have a rate of 1.75 on our mortgage when we close. We have decreased our amortization period to 17 years to take advantage of the low rate, if/when rates go up we can either lock in to a fixed or lengthen our amortization.

I didn't realize this was possible until we met with her yesterday. I wanted to post it here so that others can take advantage of it (it's only valid if you went to RBC for preapproval.) I'm so glad we did!

[K.C.]

Which means.....we can sign up for a a VRM for prime -0.75. We are going to have a rate of 1.75 on our mortgage when we close. We have decreased our amortization period to 17 years to take advantage of the low rate, if/when rates go up we can either lock in to a fixed or lengthen our amortization.

I didn't realize this was possible until we met with her yesterday. I wanted to post it here so that others can take advantage of it (it's only valid if you went to RBC for preapproval.) I'm so glad we did!

Thanks for posting that. I'm so jealous! That is creative. I'm starting to think going with the variable for at least 6 months might be a great idea. If the rate actually does end up going to zero, variable is the way to go for the short term. I'm going to ask our lender about that this morning.

[K.C.]

We were able to do a balance transfer late last spring from our high interest credit cards to Costco's Amex card at a rate of 7.99% indefinitely on balance transfers. Unfortunately they won't allow us to add onto this the high interest debt we've accumulated since then even though we have lots of available credit. I'd buy a one year old Chrysler Limited on my Amex if they did!

We also got a 3.95% from National Bank on balance transfers we did last fall from another credit card but the rate expires in May and then it goes back up to some astronomical amount.

We'd planned to pay off all our credit cards from the proceeds from the sale of the house but the market tanked and we couldn't list for as high as we had planned.

I'm going to start shopping around for credit card companies offering super low interest balance transfer rates even if they are only good for 6 months.

In six months maybe the banks will be more reasonable with their unsecured loans.

You know the world is upside down when you can get a lower rate from credit card companies than you can from banks.

[K.C.]

Which means.....we can sign up for a a VRM for prime -0.75. We are going to have a rate of 1.75 on our mortgage when we close. We have decreased our amortization period to 17 years to take advantage of the low rate, if/when rates go up we can either lock in to a fixed or lengthen our amortization.

Your rate could go as low as 1.25% if bank of Canada goes to 0?! If this is your first house you really scored. Congratulations!

Our lender won't honor what the variable rate deal was when we qualified. They say your rate is only as good as it is because you went through the builder.

I'm definitely going with variable and reducing the amortization. If rates go up or we need to lock in at a higher rate 5 year fixed we can go back to the amortization we were approved for.

One note from our lender. She said if you are going to go variable they need to requalify you at a slightly higher rate than the fixed to protect themselves if the rates skyrocket and you have trouble making the payments.

[babymaeby]

Our mortgage specialist said that since we are approved for a 17 year amortization, that if we need to extend to 25 - 35 years, (if we lost our jobs, got sick etc.) then we would only need to pay any additional cmhc premium but would be able to do that without any other penalties. It's good to know if rates do take off that we would still be ok. As it is our monthly payments are about equivalent to a 5% fixed rate at 25 years.

[K.C.]

As it is our monthly payments are about equivalent to a 5% fixed rate at 25 years.

It sounds like you're completely covered. Your equity is going to build fast.

Just make sure you are obsessive about following the rate changes every month. When the market turns around the variable rates might go zooming up.

[K.C.]

http://www.theglobeandmail.com/servlet/story/RTGAM.20090304.WBstreetwise20090304085912/WBStory/WBstreetwise

However, with rates this low, the challenge to the Bank of Canada and U.S. policymakers is deploying non-traditional stimulus to kick start the economy and avoid deflation.

While Canada's big banks matched the central bank's cut on Tuesday, lowering prime to 2.5 per cent, the full extent of these unprecedented reductions in short-term rates won't be passed on to consumers.

Banks fund many of their consumer loans, such as five-year mortgages, with longer term funding, such as five-year GICs or five year bond issues. The cost of this funding remains relatively high, and that's reflected in the mortgages rates posted in any branch.

[K.C.]

They've been extremely reluctant to pass along the rate cuts on the longer term fixed mortgages. They've been gouging their customers on lines of credit and unsecured loans as the Bank of Canada rate has been going down.

But they're also calling people up and offering them super low interest rates on credit cards for balance transfers. We've already taken advantage of two of these offers. There are alot of offers out there below 5% for credit cards! Some of them are good for 3 years. My rate of 7.99% on the Amex is good indefinitely for the balance that already exists. Some of them are as low as 2 to 3%. Are they insane?

My existing rate of interest on my mortgage for the 5 year fixed is 5.5%, we blended back in May and they used a rate of 7.25%.

Maybe I should have got myself a low interest credit card with a credit limit of $500,000 and paid for the house with that!

The banks are hiding something from us. They don't want us to know just how much trouble they are in. Now they're starting to complain that they can't get enough business. Well that's usually what happens when you start ***k*** with your customers.

CIBC sees mortgage market slowing: http://www.thestar.com/Business/article/596755

[K.C.]

So we paid the penalty to break the mortgage. If we had gone with a blended rate even with the lowest fixed rate they could offer we would have paid an additional $41,000 in interest over the next five years.

We paid $10,000 to save $31,000. Boy I'm really glad we figured this out.

You know what you can do with $31,000? ALOT! Hey that just about paid for my brand new car. That's what the car companies should do, teach people how to break their mortgages.

Here's a link to an online mortgage calculator: https://www.rbcroyalbank.com/cgi-bin/mortgage/mpc/start.cgi

[fugee]

Good for you KC!

[K.C.]

Thanks Mat. My lender kept steering me the wrong way. She was calculating the savings based on my existing mortgage not the new one. I said I'm not planning on staying at the old house for the next five years. The new house costs alot more so the savings are going to be more if I break the mortgage. They make it out like it's rocket science but it's not hard ... of course it took me about a month to get a clue. When I finally figured out how much I was really going to save, I wanted to smack her!

[K.C.]

I'm so glad I broke my mortgage and went with a variable rate that can be locked into a 5 year fixed anytime. With this cut my rate is going to be 2.9%. Not as good as some but a hell of a lot better than the 5.5% I had before I broke the mortgage.

http://www.cbc.ca/consumer/story/2009/04/21/bank-canada-rate.html

The Bank of Canada on Tuesday lowered a key lending rate again as the central bank reduced its economic outlook for 2009 and 2010.

The bank reduced the overnight rate by one-quarter of a percentage point to 0.25 per cent, which the bank said is the lowest effective rate. The lending rate will remain at the level until the middle of 2010 — depending on inflation rates — as the Bank of Canada tries to get the economy moving.

Signalling that it plans to put the trend-setting rate on hold for more than a year is an unprecedented move for the central bank, said TD Bank economist Don Drummond.

"I think it's unprecedented anywhere in the world," Drummond said. "We can't find any central bank who has ever done anything like that."