BEWARE OF THE FINE PRINT. What could mortgage breakage penalties COST YOU?
I meet with clients on a daily basis to discuss their mortgage options and I often ask “what is your number one priority as I help you shop for a mortgage?” 99% of the time I get the same answer: “I want the best RATE!” Fortunately, I work with 35 of Canada’s top mortgage lenders so I have the best rates available….However, that’s the easy part. Most importantly, my job is to educate my clients and ensure they compare different mortgages on more than just rate. One of the most important things to compare is the potential mortgage BREAKAGE PENALTIES at each bank. Breakage penalties vary greatly and can cost you thousands (and thousands and thousands) of dollars if you are uninformed. In an example I will break down for you the difference is more than 10 TIMES as costly to break a mortgage between two different lenders.
A large number of Canadians break their mortgage, or refinance before their term is up. Sometimes it’s for unfortunate reasons- divorce, moving out of the country, forced to sell and go back to renting etc, but also can be because of a positive situation or opportunity- common right now is to take advantage of lower rates, pay off other debts, etc.
Unfortunately some banks prey on the fact that the odds of someone breaking their mortgage is very high. In fact, some reports say that over 70% of Canadians will break a 5 year mortgage before the term is up.
BIG BANK “Strategy”: offer an attractive “up front” rate knowing they’ll be able to hammer the majority of those who take the bait with huge fees down the road. (Similar to those 0% credit card offers… miss the payment date and is 19.99% backdated to the very 1st date and dollar!) You’re smart enough to see through that, so be smart enough to ask the right questions when speaking with certain banks.
In our example today- we’ll say you currently owe $300,000 on your mortgage, there are 4 years remaining in the 5 year term and you have a rate of 3.09%. CIBC for example will want $10,961.13!!!* to break this mortgage.
(Their online mortgage breakage calculator here), Oh, and don’t forget to add in the rate discount you received……cause they’re going to want that back.
But you…..you’re savvy…..you went to BMO and got that awesome 2.99% 5 yr rate. Ok, let’s say you have 4 years remaining on that 5 year term. What would you owe if something changed and you had to break that mortgage? – $32,633.28!!** But hey, at least you can brag to your friends that you landed an awesome 2.99% rate, right?
Our “Strategy” with the HW Advantage: Let’s say your Mortgage Broker (yours truly) educated you on the above, then recommended another lender who also offered the 3.09% rate like in our CIBC example.
In this case we’ll use First National Broker Lender. What would your breakage be here for the same mortgage breaking at the same point in the term?: Only $2,373.55***. So in this case, your 2.99% bragging rights with BMO cost you $30,259.73.
Based on the above explanation it’s pretty obvious why I educate my clients and ensure they can compare mortgages on more than just rate. It’s also a big reason why I am a supporter of broker only lenders. They don’t have the national recognition (or marketing budget) of a big bank like BMO, RBC or CIBC but their breakage penalties are not nearly as bad.
Before you buy your next home, take out equity to pay off debts or renovate contact me directly to ensure you are fully aware of your options. I do offer mortgages from the big banks (TD and Scotia) as they do have some great products/options. However, because I work for YOU and not the banks I make sure you are aware of all your options in order to make the best decision possible.
*Using CIBC’s online Mortgage Prepayment Calculator based on a balance of $300,000 with 4 years remaining of a 5 year term at 3.09% with a $1433.63 monthly payment, 2% discount and 25 year amortization.
**Remaining interest owing on a balance of $300,000 with 4 years remaining of a 5 year term at 2.99% amortized over 25 years.
***Using First National’s online Mortgage Prepayment Calculator based on a balance of $300,000 with 4 years remaining of a 5 year term at 3.09% with a $1433.63 monthly payment.