It’s no secret that having a good credit history is important when buying a home in Canada. But what if you don’t have one? Don’t worry – there are still ways for you to buy your dream home! In this…
Did you know that three out of five Canadians break their mortgage within three years of a five-year term? Pretty crazy, huh?! And sometimes these penalties are a real shocker because no one tells you what to expect before you go ahead and break that mortgage early.
The key is to know what you’re getting into before signing your mortgage contract. At nesto, the only surprises we want you to encounter throughout the mortgage process are pleasant ones 😊
No matter what, if you break your mortgage and pay it off before the end of your term, you’re going to face a penalty. But the size of that penalty can vary wildly depending on how far you are into your current mortgage term, the type of mortgage you have as well as the lender providing you with that mortgage.
So, let’s take a look at the scope of penalty you can expect to pay if you want to get out of your mortgage early. If, for instance, you have a $400,000 mortgage that you break within two years of a five-year term, it could cost you upwards of $19,000 with a big bank! Breaking that same mortgage with one of our lenders could cost as little as $3,000. That’s a $16,000 difference! Imagine what you could do with a $16,000 savings.
How are our lenders different?
When working with nesto, you have access to a wide variety of lenders. More lenders means better options and savings for our valued clients.
We’re all familiar with banks and credit unions since they have branches we can walk into as well as often hefty marketing budgets. (Hmmm… perhaps they can afford to spend a lot on bringing new customers in the door if they’re overcharging existing ones in the form of big penalties?!)
Monolines are dedicated mortgage lenders. The term ‘mono’ actually means one, as in a singular focus. So, while lenders such as banks and credit unions provide an assortment of financial products and services in addition to offering mortgage financing, monolines only concentrate on mortgages. They won’t try to sell you additional services.
Monoline lenders follow the same rules as Canadian banks, and actually help keep mortgage pricing competitive, so you can feel equally confident if your mortgage is placed with this type of lender.
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How are penalties calculated?
Most fixed-rate mortgages come with a penalty that is the higher of three months’ worth of interest or the interest rate differential (IRD). Pay special attention when you hear “IRD”, because these are the huge penalties you read or hear about in the news that cost borrowers thousands!
IRD is based on: 1) The amount that is being prepaid; and, 2) An interest rate that equals the difference between the original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of the mortgage. The tricky part here is that some lenders base it on the posted rate while others look to the discounted rate you received at funding. (This is a big difference, as you’ll see in the example below.)
When selecting a mortgage, it’s important to ask upfront about penalties. Let’s face it – life happens. A lot can change over a five-year period, or whatever term you select for your mortgage. If you have to break your mortgage contract before your term expires, it’s reassuring to know it won’t cost you a fortune to do so.
Here’s a Monoline Vs Bank comparison example of how penalties are calculated:
|MONOLINE PENALTY CALCULATION||BANK PENALTY CALCULATION|
|Your Current Rate & Remaining Term23 months and 3.49%||Your Current Rate & Remaining Term23 months and 3.49%|
|Subtract Current Posted Rate Closest to Remaining Term 3.74%||Subtract Current Posted Rate Closest to Remaining Term Minus Original Discount3.24% – 1.3% = 1.94%|
|Divide by 12 months/year||Divide by 12 months/year|
|Multiply by Time Left on Mortgage & Balance3.49% – 3.74% / 12 x $400,000 x 23 months = $0||Multiply by Time Left on Mortgage & Balance3.49% – 1.94% / 12 x $400,000 x 23 months = $11,883.33|
|In This Case, the IRD would be $0, so a 3-Month Interest Penalty Applies: $3,490.00||IRD Penalty is: $11,883.33|
|Savings = $8,393.33||Extra Penalty = $8,393.33|
Have questions about mortgage penalties or your mortgage in general? We’re here to help.
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