Know Thy Penalty

Photo of a Referee - Penalty If there’s any chance you’ll break your mortgage before its term is up, know what kind of penalty you’ll be slapped with.

A lot of people never bother to look into it. They’re usually either apathetic or they don’t envision breaking their mortgage.

In reality, people exit mortgages early all the time. They do it to take out equity / consolidate debt, sell the property, get a better rate, apply a windfall lump-sum pre-payment, add a readvanceable line of credit, or even get divorced.

These and other reasons help explain why the average 5-year fixed mortgage lasts just 3.5 years.

In any case, penalties usually come in two flavours:

IRD penalties are usually the more heinous of the two, and their calculation methods often differ by lender. (Here’s a story to that effect by the Globe).

The Globe cites an example where a lender’s use of posted rates in its IRD formula costs thousands more than a lender which uses discounted rates.

If you’re not sure how your lender’s IRD penalty is computed, ask your mortgage planner or banker to explain it with an example.

Another thing you can do is search Google for that lender’s “standard charge terms.” The penalties are usually explained there.

Here’s a sample IRD explanation from BMO’s standard charge terms:

IRD-Penalty-Clause

 

 

  1. Im breaking in about 6 months, 2 years into a 5 year with First National.
    Our current rate is 4.99. Im scared to see what the fee is gonna be.
    We are building and dont like the way they have been treating us, so we are going with BMO who have been very helpful.

  2. You may want to consider porting your mortgage instead as it will save you the penalty for now. You could be looking at a huge penalty which won’t really be worth the interest rate savings. Perhaps somebody who works with First National might be able to help you get the help you need with this. If you are interested go to my website and get my contact info.

  3. I’ve been with First National for a few years now too and I agree their service has completely deteriorated in the last year.
    Used to get right through to them and they were very pleasant to deal with but now you wait on the line for 10 to 20 mins and they are very rude all the time.
    I will be switching lenders too when my term is done in 6 months too. The reason I liked FN was because they posted their best rates and I knew what I was getting. But after talking to people at the banks about this, BMO and CIBC both said they are more than willing to match or beat those discounted rates and you get much better service with a big bank, IMO.

  4. I think I will save in the long run. I think the fee is gonna be less then 5grand.
    And at BMO we will likely get a 3.99 or lower mortage. The amount oweing to FN is 145,000. Even at 1% savings, thats 1450 in interest saved per year.

  5. “you get much better service with a big bank”
    I so disagree with that statement. I have had nothing but headaches with our bank in getting our mortgage. I honestly think the people at banks must have a maximum of 3 days training before they cut them lose on customers. Our bank lady was so SLOW and clearly didn’t know what she was talking about half the time. It was probably because she was a mutual fund salesperson in addition to her “other hat” as a mortgage specialist.

  6. I think that’s a good move you’ll save at least your 5k over 5 years just by the 1% lower rate alone. 3.99 is better than FN’s 5 year at the moment and they are completely non-negotiable to rates! At least the bank is slightly negotiable to good customers. You might even want to wait a few more weeks to see if BMO no-frills goes down to 3.89%. I wouldn’t say fixed rates are going up anytime soon.
    @G.Adams…definitely agree with you about bank people selling every product instead of just mortgages. However, for me, I know a lot about mortgages myself (in part thanks to CMT), so I go wherever the rate is lowest and the servicing is the best. I can run amortization scenarios on my own.
    It has been my experience that the big banks provide much better mortgage servicing than other FI’s and they will match their rates also, they just don’t advertise that they do. IMO means in my opinion. I wasn’t stating that as fact.

  7. You may want to sit down and crunch the numbers properly before making these decisions, ensuring your calculations and logic is correct.
    Far to many people jump at lower rates with lower payments without realizing the net effect.

  8. My wife and I recently went to TD for our mortgage. We’ve been customers of TD for 20 years. I was shocked when their “mortgage specialist” quoted us rates way above what I can find elsewhere. She wouldn’t budge at all. We were so pissed off we moved all our banking to another institutiton. Saying banks match rates and their service is better is a bogus generalization. At least it was in our case.

  9. I wasn’t generalizing. I said in my case and experience they matched the rates and had far superior customer service. I used to tell people that maybe the reason they didn’t get the best rates from the banks was their beacon score, but I got a rate match from two banks and I wasn’t even a customer (yet) so there’s no way they could’ve pulled my score.
    Saying that banks never match broker rates and have horrible service is also a BOGUS generalization.

  10. As one that worked at TD I can tell you there was NO training provided. I was told “a credit application is a credit application” If it is for a $500.00 visa card or a mortgage the application is the same. “Go to it”. (Ironically the applicatoin is the same on the computer for both) I was to meet with the customer (never having a mortgage and knowing very little about the product.)
    In branch employees know very little about the products, and even less about market conditions. They are expected to do it all.
    WHEN I WAS AT TD I WISH I WAS GIVEN 3 DAYS MORTGAGE OF TRAINING PRIOR TO PROCESSING MY FIRST MORTGAGE APPLICATION; AT LEAST I WOULD HAVE HAD A CLUE WHAT I WAS DOING!
    B

  11. None. I work in health care. I’m not touchy, I’m just showing him/her that she is doing exactly what she appears to be against: generalizing.

  12. Hi, did you talk with the branch manager? Did you consult anyone else within TD? Did you bring in rates that you found at other banks? As a TD employee I’m shocked we didn’t match or beat any rates you’ve come across….Give it another try, don’t pay extra fees to another bank.

  13. There’s probably a reason why you dont work with TD anymore because I know for a fact TD has extensive FSR and FA training programs not to mention Regional Managers, BM’s etc. You have WAY more resources within a bank!

  14. Banks provide way fewer resources to their mortgage specialists than brokers have access to. Bank specialists get no product information from any of the dozens of other lenders. All they can sell is their own limited products. The worst part is that they never objectively compare their products to other mortgages on the market. That leaves bank customers unaware of other options that might have much better rates and flexibility.

  15. My beef with banks is that they sometimes match and sometimes don’t. Either way, who has patience for rate matching games? To me, I’d rather work with someone that is honest and quotes the lowest rate from the beginning. Frankly, I think it’s ridiculous that banks make you call their bluff to get their best deal? Everyone knows that banks rarely offer their best rates up front. That is an antiquated business model that cheapens the customer relationship and puts banks on par with used car salesmen.

  16. I agree with your sentiments, I used to think exactly the same way too. I dind’t like playing the games. Then, 4 mortgages later, I realized the brokers I’d been working with also had a hidden agenda and the mortgage servicing from their FI’s was worse (for me) then I’d ever experienced at the banks. So I walked into the bank and told them basically what you are saying about the rate negotiating game and they offered to match or better on everything.
    It’s unfortunate, but the banks make a lot of their profits on people who pay posted and don’t negotiate. I can’t say I really feel sorry for these people since:
    1) I own bank stocks, and
    2) People need to start doing their due diligence. This “bail out” mentality in Canada has got to end. The government (and banks for that matter) have no obligation to bail you out when you fail to read the fine print or fail to seek out alternate advice (in this case, get more quotes on rates).
    If the banks can make you pay 5.5%, when you can easily find 3.89% out there today (with or without a bank), then I don’t have much sympathy for you.

  17. David, You obviously used the wrong brokers but that isn’t a reflection on the whole industry. While you side with banks, many others prefer the lender comparisons and unprejudiced advice of a good broker. It doesn’t matter if a bank will match a rate or not. As long as you’re getting competitive rates, the only thing that matters is the capability of the mortgage product itself and the advice and service you receive.

  18. You are right, clearly. But every time I ask for suggestions or referals to a good broker for my situation nobody answers me!
    I can look up brokers on the web all day long, but to me they all look the same online. It might be nice to have a resource for brokers to emphasize their “specialty areas” to the public, instead of relying on word of mouth.

  19. I don’t have positive experience with RBC , TD or Scotia in regards to mrtg rates offer. Nobody could offer competitive rates. I have good standing with both RBC and TD, and specifically Scotia Branch in Ajax (hwy 2 & harwood) is the worst branch I dealt with. I broke my 5 yrs term with Scotia 1 yr in the term. Hail variable mrtg. If ship goes sown, I will go down with it, I have lost too much in last 4 yrs. :-(

  20. Banks will always be a one trick pony because they can’t sell competing products. No bank has the best mortgage for everyone and banks never disclose when other lenders have better products. This is their biggest shortcoming.
    The second biggest shortcoming is the quality of advice you get from the glorified bank tellers (I mean “mortgage specialists”) that banks use to sell their mortgages.

  21. That’s true. It’s definitely up to the consumer to compare the different products and rates themselves when working with banks.
    Personally, I would never put much faith in advice from a bank employee anyway.
    While I try and be loyal whenever possible, banks (and mortgage brokers for that matter) are only as good as their last rate, product, approval, etc. It’s unfortuntate, but true when large sums of money are involved.

  22. i’m still stuck in a 5.69% 5 year mortgage – was apparantly the best available to my Mortgage Broker at the time.
    The IRD penalty is something like $14,000 and running the numbers means even if I moved to a 3.99% rate it would take me years just to break even with the penalty, so not much point really. Feel really peeved that there is all these cheap rates out there and no way to take advantage of them.
    Do I have to wait to maturity to avoid the IRD altogether or if I get out a few months before it ends can I just pay the 3 months penalty – any ideas anyone? thanks a lot.

  23. Tony
    What is your mortgage balance and remaining amortization?
    Who is your lender?
    How many months left on your current mortgage?

  24. Hi Vince,
    $187,000 remaining from original $197,000 mortgage. Just over 2 years left on the 5 year term. Its a standard 25 yr mortgage via Firstline.

  25. Tony
    Your $14k penalty kills the numbers. I’d stick with your current lender and hope for the best at renewal in two years.
    If your penalty was half that, I would refinance now.

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