If you’re a first-time home buyer, you might have it in mind to pay off your mortgage as quickly as possible. The prospect of making extra payments from time to time probably seems great! But the reality is: there are penalties for paying off your mortgage sooner than agreed. And big banks dish out the biggest penalties of all.
Thankfully, there are options. Mortgage finance companies often have the lowest penalties. As well, small banks often come with small penalties. There are frequently known as “fair penalty” lenders. These are mortgage lenders that charge you a reasonable penalty for prepayments — usually three months interest at your current rate. Big banks on the other hand will often use an IRD (interest rate differential) calculation to form your penalty cost. The IRD takes the amount you owe and the time left on your mortgage but uses today’s interest rates to calculate the penalty. This more than covers the bank’s losses and can total several times what you would pay with a fair penalty lender.
For example, lets say you have a 5 year fixed mortgage at 3.19% with 4 years remaining. A fair penalty lender would charge you about $2,400 to break the mortgage early. A lender that uses an IRD could charge you up to $17,000 in penalties! Richard Beaumier, Vice-President of the Political Action Committee of the Quebec Federation of Real Estate Boards, has said in the past that, “This is not a penalty. This is a penalty, plus a cost reimbursement, plus an overcharge.”
So what’s a would-be mortgage owner to do? Well, first off we should admit that not ALL big banks are bad. So if you want to work with one, make sure you find out exactly, in detail, what the mortgage break penalties are. Some of them are actually quite fair. Another option is to find a smaller bank or mortgage financier that offers fair penalties. You also have the option to choose a short-term rate so that you have more flexibility and don’t have to worry about staying put for long-term. People move, change jobs, lose jobs, get married, get divorced, have kids, go back to school, find a lender with a better rate — there are myriad reasons people might need to break their mortgage early.
The cost of sticking with a big bank just because it is familiar, because you like their ads, or because that’s where your daddy and your granddaddy and your great-granddaddy banked — is steep. If you’re looking to get out of your mortgage early, or if you’re hunting for a mortgage with reasonable penalty rates, contact us today for advice.