Getting you the mortgage you deserve
Why Shop For A Mortgage?
September 15, 2020 | Posted by: Vincent Iervasi
Mortgages By Vince
- Prepayment Penalties
When shopping for a Mortgage it is very important to focus not only on the Interest Rates, but also understand the conditions and features of the Mortgage as well. Although locking in a low rate will save you money, there are many other features a Mortgage Contract may hold that can either SAVE or COST you money.
Prepayment penalties are incurred when a Mortgage is broken and/or paid off prior to the end of the contract maturity date. Many of you may be wondering “would I ever break my Mortgage contract or pay it off early?”… Well my answer is “YES! It happens often”. Sometimes individuals experience life situations that may either inherit them money or cost them money, financially forcing them to change the Mortgage contract or sell their home.
For example, you may be forced to sell due to a growing family, job loss/promotion, divorce, or health related issues. Some of these are unforeseeable and hard to prepare for. In most cases it may leave you with no choice but to sell your home, breaking your Mortgage contract.
Now, lets focus more on those Prepayment penalties because when breaking your Mortgage contract is when you will be faced to deal with them.
Majority of Closed Fixed Rate Mortgages will have an IRD (Interest Rate Differential) or 3 months interest penalty, whichever is HIGHER. In order to calculate IRD, the big banks will subtract your original agreed POSTED Mortgage rate to the rate it can charge today and then multiply that by the amount of the Mortgage being paid off.
Now remember, the IRD is paying the investors who lent you the money. Even though you may be paying your Mortgage off early, the investors still want to make money off the original agreed terms, makes sense, right?!
Monoline Lenders VS. Big Banks
Now, “Monoline lenders? who are they?” Monoline lenders provide Mortgage loans and only Mortgage loans, they do not provide any other products. Their focus is to stay competitive in the market by providing highly attractive Mortgage contracts with competitive rates. The big banks focus on a variety of banking to ensure the consumer experiences complete satisfaction through all channels of banking, Chequing accounts, Savings accounts, Investments and Mortgage lending.
5-Year Fixed Rate Mortgage at 3.50% in 2016 $550,000. BIG BANK (discounted from its posted 5.44% rate)
5-Year Fixed Rate Mortgage at 3.50% in 2016 $550,000. MONOLINE LENDER
Now you want to break it at $450,000 with 2 years remaining on the contract.
Big Bank has posted 2-year term at 3.64%
Monoline lender posted 2-year term at 3.29%
= 0.0015 Monthly IRD
= 0.000175 Monthly IRD
As you can see, the prepayment penalty in comparison to both lenders is $14,310 more with the big bank. Although interest rates hold a huge significance in saving money throughout the lifetime of your Mortgage, so do prepayment penalties as well.
Always ensure you seek professional advice from a Mortgage Professional, do your research and due diligence when seeking a Mortgage to ensure you capitalize on savings throughout the contract.
Contact me at (647) 993-1305 as I would love to discuss and assist you with your Mortgage and provide you with professional advice.
*all rates are approximated and do not reflect real time interest rates. The rates used in this example were simply gathered to demonstrate a practical/approximate example of prepayment penalties in Mortgage contracts.
Vincent Iervasi, BBA
Contact: (647) 993-1305
Mortgage Intelligence #10248