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Archive for the ‘Penalties on Mortgages’ Category

Is It Time To Re-Do You Variable Rate Mortgage?

Wednesday, November 10th, 2010

Transcript of Video Blog:

Hey, everybody. It’s Rowan Smith with the Mortgage Centre. What I want to talk to you about today is getting out of your existing variable rate that you may have got at a higher rate than is available today, getting into today’s lower rates. Let’s look at what happened.

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Penalties and Mortgages and how Non-Banks Can Help

Friday, November 5th, 2010

Transcript of Video Blog:

Hi, everybody. It’s Rowan Smith with the Mortgage Centre. I want to talk today about interest rate differential penalties, mortgage penalties, and non banks. The reason I’m bringing this up is a lot of people have said to me, “Rowan, how come you don’t fund more mortgages with TD Bank or Bank of Montreal and all the big banks?”

The reason is, amongst many other things, but one of the primary ones, and the one I want to talk about today, is their penalty calculation. In my experience, the big banks have a more punitive form of interest rate differential calculation than that that we get through a non bank.

The reason being is most financial institutions, most of the big banks, will base their penalty that you’re going to pay on a fixed rate mortgage off of their posted rate, which is much higher than, say, a discounted rate. The difference right now can be the difference between 5.29 being posted and 3.49 or thereabouts being their discounted rate.

Well, if you were to add that up over five years, the difference between 5.29 and 3.49, figure out what that portion is, it can be pretty huge. So you want an institution that’s not going to use a high posted rate or not going to use a high rate on their IRD, interest rate differential, penalty calculation.

Now most non banks don’t even have posted rates, so when they’re calculating their IRD, they’re basing it off of a much lower rate. In other words, you’ll be paying a penalty between 3.79 and 3.49 for the remainder of the term versus 5.29 and 3.49. It’s a very big difference between the way those penalties are calculated.

This is all nuts and bolts stuff that goes on the back end. You won’t be aware of it until you go to pay out your mortgage and are horrified by the penalty with your big bank. So if you’ve been dealing with the same institution for many years and you’re fiercely loyal to them, understand they are in it to make a buck, and they’ll make it on you.

For the Mortgage Centre, I’m Rowan Smith.

IRD Penalties – Mortgage Penalties in Canada – Interest Rate Differential

Sunday, September 19th, 2010

Transcript of Video Blog:

Hi, everybody. Rowan Smith with the Mortgage Centre. Today’s topic is going to be interest rate differential penalties and payout penalties. Now most mortgages in Canada, when you pay them out and break the term, there’s going to be a penalty.

If you’re in a variable-rate mortgage, chances are it’s only three months’ interest, but how penalties are calculated on fixed rates varies from institution to institution. It typically is the greater of three months’ interest or the interest rate differential.

Now they’re obligated to disclose this to you when you get the mortgage. What they’re not obligated to disclose to you upfront is exactly how that interest rate differential is calculated.

A lot of people are getting shocked when they see the new lower rates today, they want to take advantage of them, they want to pay out their existing mortgage for the new lower rates, and then they find out that by doing this they’re going to be facing an absolutely enormous penalty, because again, it’s the greater of three months’ interest or the interest rate differential.

The interest rate differential is a bit of a formula that looks at how many months are remaining in the term, the amount of interest you were paying now, what the bank could get on similar terms of money remaining that you have today, and they do some sort of a calculation.

It varies from institution to institution on what rate they compare they could get versus what you’re paying and all this type of thing, so it’s very important to ask your institution and go over this in advance.

Now a lot of people facing these penalties throw up their hands and say, “Well, I was never informed of this” and actually, they are. Most cases, in fact, all of them, they would have had to sign off on this at the lawyer’s office. There’s no way you could have gotten a mortgage without having being disclosed at some point that there was an interest rate differential calculation in there.

Now you may not remember it, and in fact, the person you were dealing with may not have explained it to you very well. This is where the onus is on the borrower to make sure they’re informed on what they’re doing, but also on the broker, if they’re dealing with a mortgage broker, to explain to them the situation and to explain to them how the penalties are calculated.

This became real clear to me, because I do most of my mortgage reading in the gym while I’m on the treadmill. I came across an article today which I’m going to actually bore you with by reading just a very, very brief snippet of it so that you can see exactly how this was ruled by a governing body.

“A borrower complained that they paid an interest rate differential penalty substantially higher than that projected by the mortgage agent. The ethics committee chair concluded that the borrowers were aware of the higher penalty for at least 24 hours before they went ahead with the new mortgage and paid out the old one using the interest rate differential.

The chair noted that the borrowers were not compelled to pay out the mortgage, but they chose to do so. As a result, he concluded that the payment of the higher IRD was a result of the borrower’s actions and not the members, not the broker and ruled that there was no violation of the code of ethics. The complaint was dismissed.”

So in this case, the chair felt that the borrower had been disclosed how the penalty would be calculated. Because the lender had not compelled them or forced them to take this payout, probably because they were trying to get the lower rates, which is understandable, they didn’t hold the broker or lender …they don’t make it clear if it was a broker or a big bank that was involved in this complaint was not held responsible.

So the bottom line for this blog post today is know what your penalty is before you sign those mortgage documents at the lawyer’s office. If you’re one of my clients, I always cover off how these penalties are going to be calculated and what you can face.

But please, ask the questions if you don’t know, because saying that you weren’t informed later won’t be possible given that it is contained in all mortgage documents you sign at the lawyer’s office.

For the Mortgage Centre, I’m Rowan Smith.

How Are Mortgage Penalties Calculated?

Sunday, April 25th, 2010

I’m getting lots of questions about why bank penalties have fallen in the last three weeks. This blog explains the calculation methodology behind it:

Transcript of Video Blog:

Hi, everybody. It’s Rowan Smith from the Mortgage Centre. I wanted to address penalties, and interest rate differentials, and three month interest penalties and how it all works today in this blog.
I’m getting a lot of inquiries about it. There’s some confusion as to why rates have gone up and penalties have gone down. Well, let’s look at the standard mortgage terms.

For variable rates mortgages, most institutions, the way that it’s going to work is if you break the term at some point during any time; now most variables are five year terms, but some of them are three years.

That means that during that period of time, your discount or your premium on your rate will not change. For example, if your rate was prime rate plus a quarter, for five years you would always be prime plus a quarter regardless of where prime went. Up or down, you would follow it with a quarter percent.

You’re guaranteed that, so should banks go with prime plus a half or prime plus one, you’re still guaranteed to retain the prime plus a quarter throughout that five year term.

In exchange for that security, if you break that term, that five-year term, to sell your house, or you need to refinance, take equity out and end up doing it with a different lender, you’re going to pay a three month interest penalty.

That said, it’s a non negotiable. It’s going to happen at every single institution. However, the three-month interest penalty is the only one that will apply to a variable rate mortgage. In the event that you’ve got a fixed rate mortgage, it will be the greater of three months’ interest or the interest-rate differential.

Interest rate differential is a complicated formula that essentially looks at how much time is left in your term, what rate you’re paying now, what rate the bank could get on money now, and they charge you that difference. That’s a simplification, or perhaps an oversimplification of it.

But if you visualize being at six percent, and let’s say rates went down to the 3.69 they were at and you wanted to get that rate, that bank would be giving up on six percent for the remainder of your five year term and letting you out into the lower term.

So they’re going to look at their loss/profit and are basically going to charge you that amount or three months’ interest, whichever is greater.

You can guarantee that in cases where rates have gone down, your penalty is going to be dramatically larger under the interest-rate differential. Now how far down? It depends. It’s a complicated formula.

How much time is left in your term? If you’re within the last year, it’s generally only ever three months’ interest. There are a lot of different variations in how these penalties can be calculated from bank to bank to bank.

So if you’re looking at your penalty, not quite sure if the penalty is worth paying it to get the new lower rates, give me a call and I can walk through the math with you on it and make sure that you’re making a correct decision.

Also, if you’re looking at that penalty and wondering why did the penalty go down from last month when I had a quote, it’s because rates came up. That means that the bank could get a greater rate from money loaned at the same point at time.

So if you were three years into a five year term, there are two years left. The bank will compare their profit and loss of what they would get on a two-year mortgage.

Imagine, for example, that rates have gone in two years from, let me grab a number here, 2.25 to 2.9. If you were previously paying five percent, that spread, the difference between what they could be getting and what they are getting, got smaller, thus your interest-rate differential penalty will be smaller.

As you can see, there’s quite a bit to penalty calculation. If you have any questions, give me a call. For the Mortgage Centre, I’m Rowan Smith.

Will Your Bank Waive Your Mortgage Penalties?

Wednesday, February 10th, 2010

I get a call from an angry home owner at least once a week that is disgusted with the penalty their bank is trying to charge them. They always ask me, “there must be some way around this, isn’t there? What if I stay with them and give them my business, will they waive the penalty then?”

For the answer, you’ll have to watch the video blog below. Enjoy!

Hi everyone, Rowan Smith at the Mortgage Centre. I want to answer one of the most common questions that we get, “Will the bank absorb some of my penalty if I give them my business?” The answer, absolutely not.

The bank has a legal right to that penalty in exchange for granting you a fixed rate for whatever length of time they gave you — whether it was a five-year, or a three-year, or a one-year — if you’re attempting to break that term, they can’t break the term on you and suddenly jack the rates if interest rates have gone up. They have to just absorb it.

On the opposite end of that pendulum, is the fact that you have to pay a penalty if you break the term. Now if you’re with a bank — and I’m just grabbing “hypotheticals” here. If you’re with Vancity, and you’ve been with them for three years; there’s two years left in your term, maybe you got in when mortgage rates were 5.7%, something like that.

At the time it was a great rate. Now looking back, it doesn’t look like such a great move. There is no way for you to have known that. Now that said, you made the best decision you could at the point in time.

You’re now getting an offer from Scotiabank to go over there at 3.89 for a five-year. Vancity is offering you 4.14, but they’re giving you a big penalty, somewhere to the tune of $20,000. And you’re thinking “This can’t be right. This has to be wrong.”

It probably isn’t if your rates have come down dramatically. Your penalties are calculated on the greater of three months interest or the interest rate differential at most institutions.

The interest rate differential is kind of a complex formula, but it basically looks at how much time is left in your mortgage, what rate would the bank be charging on money for the remainder of your term today, and looking at, therefore, how much they are losing and what they are going to charge you for it.

If rates have moved considerably, a percentage point or more, maybe not even quite that high in some cases and depending on the length of time left in your term, your penalty could be the equivalent of 10 months of interest. It could be very, very high.

If you are getting a quote of $15,000 or $30,000, you may want to double check with them. Don’t expect the next institution who’s coming along to try to pick up that penalty. They just won’t do it.

In the 10 years I’ve been in banking and finance, I have never seen one institution pay another’s penalty to bring the business over. I’ve never seen it. It just has never happened. I have seen institutions, when you stay with them, reduce the penalty, but I can count the number of times on one hand. And all of it has occurred with one financial institution.

So if you are thinking your penalty is exorbitant, it probably is, but we can still determine whether or not it’s a fair penalty. We can push back and make sure that their calculation that they are doing for the penalty is in line with what they are doing for their standard mortgage terms.

Now what does that mean? You’ve got to get those standard mortgage terms. You were given them when you signed the mortgage at the notary or lawyer’s office, if you are in BC. It should be a very thick booklet.

It could be 45 to 110 pages, depending on your institution. In there is a very detailed breakdown of how to calculate the interest rate differential. Now you are going to have to go to their website and pull up some of their rates. Find out what rate they are using and it’s not going to be very simple. I can help you with that.

If you want to know if you’re getting a fair shake with your penalties, what options you have, maybe I can get a bank to kick you some cash back as part of the deal to help offset some of those costs. Give me a call. From the Mortgage Centre, I’m Rowan Smith.

Audio Blog – Mortgage Penalties and How They Are Calculated

Monday, September 28th, 2009

I have been doing some audio advertisements on the radio lately, and given the number of questions that I field about penalties.

Here is the audio file for your listening pleasure, and a copy of the script I used to record it:

AUDIO BLOG – How Are Penalties Calculated


Many clients have been calling me looking to sell in this market and upgrade their home find themselves faced with massive mortgage penalties. In many cases, the penalty may have risen in the past month by over 100% from a prior quote from their lender.

Most fixed rate mortgages have two types of penalties that can be invoked by the banks. Penalties on fixed rate mortgages are generally the GREATER OF a three month interest penalty or the Interest Rate Differential. The interest rate differential penalty is only invoked when interest rates fall by a significant amount putting the bank in a position to lose a lot of profit. Remember, you got a guarantee from the bank that you would not face an interest rate increase regardless of what the market does. In exchange for that promise, the bank has the right to charge you for their lost profit in the event you break the contract.

At the Mortgage Centre, we have lots of options to help reduce the effects of your bank’s penalties. Some of those methods include blended rates, cash back mortgages, and even porting your existing mortgage to your new home… penalty free.

If you face a large penalty to get out of your mortgage, and you want to look at your options, contact me at the Mortgage Centre.

This is Rowan Smith for Radio Real Estate.