Lenders like to keep you in their web as long as possible. If you’ve got a closed mortgage and try to escape, they sink their penalty fangs deep in your wallet.
To the surprise of many, there are dramatic differences in how those penalties are calculated, even at the same bank.
CIBC, for example, sells mortgages under multiple brands, with “CIBC” and “FirstLine” being the most popular.
Recently, we did an interest rate differential (IRD) penalty calculation for a FirstLine customer who wanted to refinance. This client was fortunate to have closed his mortgage at FirstLine instead of directly with CIBC.
Had that customer chosen a CIBC-brand mortgage instead, his penalty would have been $3,210 higher—even though it’s the same parent bank in both cases.*
This difference in penalties is explained by each lender’s penalty formula. One uses posted rates and one uses rates that are more discounted. (See IRD Penalty Comparison Rates for more background on penalty calculations.)
As we’ve written before, painful IRD penalties can be a serious downside to choosing a Big 6 Bank mortgage. It’s something bank consumers rarely think about….until they need to break their mortgage (and most do before five years.)
Major banks will rarely admit how bad their IRD penalties are relative to the competition. Fortunately, many smaller lenders offer an alternative by refusing to adopt big-bank-style calculation methods.
* Assuming the same rate, balance, payments, etc.
Rob McLister, CMT
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