This article is older but does a great job of identifying the often hidden traps in mortgage penalties should a “life event” happen and you need to payout your mortgage before the end of the term.
Every quarter the banks release their earnings reports. Every quarter bank earnings seem to be massive. Have you ever wondered why?
We have a tendency to think that if we’ve been with our bank long enough, and maybe even have a relationship within the bank, they will be as loyal to us as we are to them. Penalties aren’t about loyalty or a relationship, unfortunately.
Mortgage Penalties
“A mortgage penalty compensates a lender for the interest payments it loses out on when you break a mortgage contract. “That’s the intention,” said Mr. McLister, who is also editor of CanadianMortgageTrends.com. “But in many cases, it overcompensates. It’s punitive in many cases.”
On a slightly more positive note, did you know that some of the top lenders in Canada aren’t banks AND they calculate penalties differently? In a less punitive way? That is good news!
“Let’s use an example of someone who, three years ago, set up a $250,000 five-year mortgage and has a balance owning of $200,000. Assuming an original mortgage rate of 3.64 per cent with a discount of 1.5 percentage points, the mortgage prepayment calculators at several big banks showed penalties ranging from $5,000 to $7,600 or so.
“A check with some non-bank lenders found penalties ranging from $1,800 to $2,800. These are very rough comparisons because lenders differ a fair bit in what information they ask you to supply. But you get the picture – the big banks apply penalties with a sledgehammer.”
And this is a far more favourable difference than I’ve seen in the past. I had clients who 
over three years into their five year term had a penalty of almost $25,000 if they wanted to refinance just to get a lower rate – WOW! This penalty could have easily been less than $8,000 with a lender with a much less restrictive calculation.
This is why it’s so important to talk to a me, a licensed Mortgage Broker. We have access to banks and non-bank lenders and can explain the differences among them.
Don’t get stuck in a product that eats away at your hard earned equity, talk to me first!
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