Mortgage penalties: the small mortgage clause that can cost you dearly. Find the best mortgage rate. This is often the obsession of borrowers when they knock on the doors of banks. Unfortunately, behind an attractive rate sometimes hide clauses which are much less attractive. In some cases, these potentially costly details are not even offset by a favorable rate. Mortgage penalties can cost a fortune. Today we invite you to navigate the murky waters of mortgage breach fees.
Determine the best mortgage rate.
Mortgage prepayment: an application that can be expensive
Prepayment of a mortgage loan can happen because there is a large amount of unexpected inflow of money. Often times, however, mortgage breach is forced by adverse conditions. Divorce, job loss, financial difficulties … In one of these unfortunate contexts, you will have to pay your mortgage before the deadline.
And it’s often when they are faced with a fait accompli that borrowers understand the dangers of mortgage penalties. If we haven’t been careful with what we sign, they cost thousands of dollars. Fees regularly exceed the 5-figure mark. They may have been criticized for years, nothing changes. Every year, many Canadians make their unpleasant acquaintance.
How much do mortgage penalties cost?
It all depends on the signed contract. It is possible to prepay, and without charge, 15 to 25% of the original loan amount in many cases. But if you want to repay the full amount, you will have to pay the penalties provided for in the contract.
In the event of a variable rate, the penalty is often three months’ interest. This remains acceptable. But in the case of a fixed rate, the mortgage breaking costs will amount to the shortfall represented by the difference between the rate at the beginning of the loan and that which would be possible to obtain at the time of repayment unless this amount is less than three months of interest. In short, it is the higher of the two that is taken into account.
Calculating the penalty based on the three months of interest is simple. You have to consult your amortization table and add the three months of interest concerned. Calculating the differential is much more complicated.
Mortgage penalties based on the rate differential: the calculation
In the event of a mortgage penalty based on the rate differential, you must calculate the difference between the rate you were granted and the rate you could benefit from today. Banks often take the posted rate into account, without the discount, when calculating, which is why the penalty fees can blithely exceed $ 10,000.
How to minimize mortgage breakage costs?
It’s simple: just don’t sign a mortgage loan that includes mortgage breach clauses that are close to abuse. They are mainly present on fixed-rate mortgages. But it is possible to find such credits with reasonable breakage fees. Lesser-known lenders often offer them. Your mortgage broker will help you identify them.
As for variable-rate mortgages, the penalty is limited to 3 months of interest. Either way, it’s much less than the cost of paying off a fixed-rate mortgage.
You can also prefer a contract that allows the transfer of the mortgage without charge. Certainly, the rate will be a little higher. But you will have the flexibility that could ultimately save you a lot of money.
Another solution is to sign a mortgage for three years, instead of the usual five years. This is all the more advisable if your chances of moving in the short term are real.
The mortgage broker, your most valuable ally in reducing mortgage penalties
Choosing the right mortgage is complex. Each case is different; we must consider each borrower’s specific situation to make the right choice. Thanks to his knowledge of the market, the mortgage broker will be able to direct you towards the most attractive solutions for you. After identifying your needs, he will help you choose the right alternative.
Some financial institutions set up real traps for their customers. Restrictions on free early repayments, prohibition on reselling the property below market value or a related buyer, exorbitant penalty fees. They use a lead product to lure you in, without explaining the deadly little details to you. in your contract. Your mortgage broker will help you avoid these pitfalls. Contact us for any information on mortgage penalties, rate guarantees, or other, without obligation. We work in the Montreal and Brossard regions.