Beware of Big Bank Mortgage Penalties
The majority of Canadians still prefer to use the large banks when it comes to taking out a mortgage on their home. And, generally they often stick with the bank that they have their accounts, credit cards and some form of lending history.
For many mortgage borrowers, the reason you choose the large banks is because you simply do not have enough information on alternative mortgage lenders. Large banks tend to appear financially stable and many mortgage investors are still skittish about the recent economic turmoil.
The other side of the coin is that many of these mortgage borrowers will want or need to refinance your mortgage at some point. Breaking your mortgage before it comes to the end of the term means you will have to pay a “mortgage penalty.”
It turns out that close to 7 out of 10 mortgage borrowers will make some form of adjustment before their mortgage term ends and are doing so to either refinance their existing mortgage or moving to purchase a larger home.
Even though you might have obtained a mortgage rate which was lower than the rate posted by the bank, you might not be aware exactly how the bank will calculate the penalty. This can cost you thousands of dollars more than you might have been expecting.
Although you got a rate which was lower than the rate posted by the bank, most of these guys use the posted rate when it comes to calculating your mortgage penalty. These penalties are actually quite expensive and almost punitive in nature.
Mortgage Penalties for Variable Mortgages Versus Fixed Rate Mortgages
If you have a variable mortgage, the penalty is generally what you would pay for the comparable amount of three month’s interest.
If you have a fixed rate mortgage, it is based on the calculation of the IRD which is short for “Interest Rate Differential” or alternatively uses the higher of three month’s of interest. Many, but not all banks may simply use the posted rate when factoring this in to calculate the penalty.
It’s vital that you clearly find out whether the bank will be using the posted rate or the actual rate to calculate the mortgage penalty. Given the cost of homes in Vancouver and the mortgages people have to carry this can be significant difference in terms of how much you will have to pay in penalties when it comes to breaking the mortgage.
The reason why some experts say the banks do this is to ensure they keep you in the fold and so you won’t go with a competitor.
Who Has Cheaper Mortgage Penalties?
Yes, there are alternatives but that means you have to go with non-traditional lenders. Most alternative lenders asides from banks are more flexible when it comes to mortgage penalties and the savings can be in the thousands of dollars when it comes to what you will have to pay as a penalty. They also often have better rates.
Before you jump on the “Big Bank” band wagon to get your mortgage, consider the idea of getting not only better rates but less restrictive mortgage penalties by using an alternative lender instead.
The easiest way to learn more about the security of an alternative lender is to speak with a knowledgeable mortgage broker such as myself as we can help you compare the savings when it comes to deciding whether to get your mortgage with the banks and what other sources of alterative lenders are available so you don’t get stuck in the “Big Bank” trap.