The penalties for breaking a 5 year fixed termed mortgage can be astronomical, that is why it is important to do your homework upfront before signing those mortgage papers. This can arise as an issue if you have to end up selling or refinancing your home before the end of your mortgage term.
An example of a client with CIBC; Douglar Clinton Govier Jr. decided to sell his house this year and still had 6 months remaining on his closed 5 year mortgage. His penalty was over $12,000.00 to get out of, which is more than one years worth of his interest payments. To him, this was ‘unreasonable’, as would be most peoples reactions. Further to this, he had asked the bank several times how this penalty was calculated and did not get an answer to his satisfaction. The only answer he got was ‘the amount could not be reduced unless he took out another mortgage with them.’
Govier has to move out of his home because he simply could not afford it anymore and had hoped to use the proceeds he received from the sale to pay off bills but because of this hefty penalty he is still in debt. He did put in a complaint but the bank did not budge. The end result, the client is extremely frustrated and disappointed.
Another example of this is a client from Laurentian Bank being penalized for a whopping $13,000.00 dollars on breaking his mortgage 18 months early on a 5 year mortgage with a balance of $330,000.00. He was planning on moving to Ecuador for retirement. This was due to a lower living cost, which after you factor in this penalty price, is not saving money at all.
When interest rates rise after you have closed your mortgage, the penalty is typically three months worth of interest. This is lower because your current lender can sign up a new client at a higher interest rate. However, if interest rates decrease, the penalty now becomes the interest rate differential (IRD) between your initial rate and the current rate until the end of the term. This is how is becomes as pricey as it has been for these two client examples. The federal government has discussed standardizing this penalty for banks before but then revoked that discussed and instead replaced it with an upfront disclosure.
If you opted for any rate discounts or cashback program for your mortgage, that may also have to be paid back if you break your term earlier than expected. This, of course, adds more to what you have to pay to get out of that term. An example of this comes from Ashley De Moscoso, she was selling her condo to buy a family home after 3 years into the 5 year term. TD Canada Trust is who she was with and they calculated her penalty at just over $2,000.00 on a $123,000.00 balance. According to her, they did not give an explanation as to why it was so high except for the fact that she received a discount of 1.5% points. They told her the discounted rate on her mortgage was listed on her annual interest statements and to them, this was disclosure enough. TD of course suggested then to transfer her mortgage to her new property to avoid paying the penalty. After this experience, Moscoso said it was not worth it to stay with TD and would ‘…never deal with them again.’
After reviewing all these horror stories on penalties, there are crucial things to remember before signing that mortgage paper:
- If you decide to go for a closed mortgage, ask the lender if the mortgage is transferable (porting) if you plan on selling your property
- See if your lender offers a discount that will be thrown into the IRD calculation when you get out of a mortgage before the renewal date
- Ask how the penalty is calculated if you want to break your mortgage before the end of the term, especially if it says anywhere that you must pay for the discount or some other extra cost
- Finally, make sure you do not have blinders on, do not make a low interest rate your only priority when searching for your mortgage. Make sure you ask all important questions ahead of time, to avoid headaches in the potential near future.
After reviewing more about penalties, this is why it is even more important to work with a mortgage broker, as they are there to act on your behalf and find the lender that is best suited for your needs!