Penalties Preventing Canadians From Cashing In On Low Rates
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Remember when your broker or banker asked you which you would prefer a fixed-rate mortgage or a variable? Most Canadians based their decision on the rates of the day and how much they would save against the fear of rates moving up.
The real cost of a fixed mortgage with some lenders has proven to be huge penalties and not being able to take advantage of existing equity or lock in for a lower rate.
I personally have always been conservative and held a fixed-rate mortgage, even as a mortgage broker. I like the idea of stability and knowing my payment. Many Canadians are just like me and want that stability. However, the often hidden secret is in the fees. With the big five banks Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank of Commerce. These banks are colloquially known as the Big Five. These fees are the largest. So most mortgage brokers will set you up with a Monoline lender, Monoline lenders are niche businesses that operate in the mortgage market only. They don’t offer bank accounts, credit cards, GICs, or investments through RRSPs as the Big Five banks do. Mortgages are their sole specialty. Monoline lenders are niche businesses that operate in the mortgage market only. They don’t offer bank accounts, credit cards, GICs, or investments through RRSPs as the Big Five banks do. Mortgages are their sole specialty, MCAP, First National, Merix are examples
There are many benefits to Monoline lenders including easier qualification, more out of the box thinking and options. The one I want to discuss is penalty calculation. When you opt for a fixed rate mortgage and you want to break that mortgage before the end of your agreed upon term, like many Canadian did when mortgage rates plummeted, you were subject to a penalty. The penalty would be laid out in your mortgage contract and state that it is the greater of the three-month interest penalty or Interest Rate Differential (IRD). Here is where the differences occur. Because rates dropped so much people had to pay the IRD penalty. I will not go into detail as to the complex calculation, but rather show you that HOW you calculate it could cost you thousands. The BIG 5 vs Mono-line lenders.
So clients with Big 5 mortgage lenders were not able to take advantage of lowering their rates, refinancing or taking out equity to purchase a new property. The message is that there is more to a mortgage than rate. Trying to save .10% on your rate and shopping around may actually cost you thousands in the end! Working with a mortgage broker will help you understand your risks and what is best for your future lending needs.