Painful Breakage Costs
Yet, while Carrick's article focuses on TD's excessive fees, TD is far from the only lender that exacts extra pounds of flesh for breaking a mortgage contract.
Others lenders do things like:
- Charge 3-month interest penalties based on posted rates instead of your actual rate like most lenders (See: 3-Month Penalties Aren’t Always Clearcut)
- Charge $300-$1,000 “reinvestment fees” on top of your penalty and discharge fees
- Charge interest rate differential based on posted rates (common among the Big 6 banks) instead of cheaper discount rates
- Impose IRD charges based on bond yields (which can sometimes be more expensive than even posted rate penalties)
- Apply IRD penalties to variable-rate mortgages
- Charge 6-12 month interest penalties, instead of three months
- Prevent early termination altogether.
Before choosing your next mortgage, ask your lender or broker for a written list of early termination charges, as well as the lender’s penalty formula.
The fairest lenders impose only a discounted penalty and a simple discharge fee. If you’re going to deal with a lender that charges you through the nose to break early, you better be confident that you won’t need to. And, your interest rate better be well below all other comparable lenders. (This assumes you’re well qualified because your options may be limited if you’re not.)
When accepting harsher termination charges in exchange for a low rate, remember that it’s not always possible to know where life will lead you 3-4 years down the road (that’s when most folks break a 5-year mortgage).
People terminate their mortgage before maturity for numerous reasons, including:
- equity take outs (People use these for debt consolidation, buying other properties, investing, educational borrowing, renovations, business start-up, etc. Many lenders let you tack on extra money to your mortgage without a penalty. Some don't. Others charge no penalty but bend you over on the interest rate.)
- job change
- new marriage (e.g., consolidating residences)
- separation/divorce
- upsizing or downsizing (if a port isn’t advisable)
- rate improvement
- amortization extension
- adding a readvanceable line of credit
- health issues
- unemployment
- relocation.
Related: Mortgage Penalty Calculators
Rob McLister, CMT
