Thinking about opting out of your fixed rate mortgage in order to take advantage of ultra low variable rates? Be careful! Interest rate differential (IRD) charges – commonly referred to as mortgage penalties – could leave a large dent in your wallet if you’re not careful.
Unfortunately, banks have historically made it nearly impossible to figure out just how expensive switching mortgages is. But that’s about the change. A new “voluntary” Code of Conduct has been implemented by the Department of Finance whereby banks are now required to provide their mortgage customers with clearer explanations of prepayment charge calculations, as well as provide calculators so that mortgage holders can estimate their own penalty estimates. Mortgage calculators can now be found on the official websites of the Bank of Montreal, CIBC, HSBC, ING Direct, Laurentian Bank, National Bank of Canada, Manulife Bank, Royal Bank, Scotiabank and TD Canada Trust.
There’s just one problem. These calculators are missing one key piece of the IRD calculation – the discount you received at the time you secured your mortgage. Most banks still require you to call into you local branch to receive this information, giving them a prime opportunity to hit you with a sales pitch.
Penalties can raise your overall borrowing costs substantially. Taking the time to estimate (or even guesstimate) your mortgage costs in advance is thus time well spent. While you’re at it, don’t forget to ask your mortgage lender the following questions:
1) What are your fixed mortgage rate penalties based on?
Mortgage penalties can be based on posted rates, bond yields or discounted rates. Most of the big lenders tend to base their penalties on posted rates as this can often result in inflated charges. Penalties that are based on bond yields can also cost a small fortune, depending on bond performance.
2) Is there a penalty to increase my mortgage?
Lenders like to charge penalties for practically everything, including increasing your financing. If you’re planning to upgrade your home and are seeking to extend your mortgage, make sure you ask your lender for details first. It might be cheaper to refinance.
3) What are your rules for porting my mortgage?
Many homeowners port their mortgage to a new property when they sell their home. Unfortunately, most lenders require you to close your old home and new home on the same day – a task that’s virtually impossible. If this is the case, ask about bridge mortgages and don’t forget to calculate any penalties into your overall costs.
4) Can I get out of my fixed mortgage?
Not all fixed rate mortgages are “breakable.” Some closed mortgages won’t let you out before maturity unless you sell your home.
5) Do you charge “reinvestment fees” on top of mortgage penalty fees?
Don’t be surprised if your lender answers “yes.” Some lenders may even require you to pay back any cash incentives that you received as part fo your initial financing deal.
6) What term do you use when calculating IRD charges?
Some lenders use a shorter term rather than the nearest term. This can increase your penalty significantly.
Improved mortgage penalty explanations and calculations can go a long way to helping you cut costs and save money. By March of next year, the Financial Consumer Agency of Canada will have gone one step further, requiring banks to provide annual information to help consumers calculate their penalty, written penalty statements upon request and access to exact prepayment penalty quotes via telephone.