The "Cost" of your Mortgage Rate is in your Penalty
Kim and John were pretty proud of themselves. As 1st time homebuyers in their late 20's, they used a mortgage broker and got approved for a mortgage and a Lender at a 2.59% with a year fixed rate. Two weeks before they are to close their new home, they were talking to their Bank about RRSP's and their personal Bank offered them 2.54% to keep the mortgage with them. Kim and John disregarded the mortgage broker advise and leapt head first into their Bank mortgage offer without really understanding the fine print.
Bank Rep has met his monthly quota and rubs his hands together in glee!
Why does this happen? Clients feel safe within the institutional walls of a Bank. It's human nature. God know why, as the Bank reps 100% responsibility is to the BANK and to SELL SELL SELL. I used to work in Banking and Insurance, I know how this game works. Many Bankers have very little knowledge of mortgages and they are certainly not licensed with their Provincial Financial Services Authority for professional mortgage advise. Mortgage Brokers take a difficult UBC Course and have well into years of experience in JUST mortgages. Mortgage Brokers fiduciary duty is to the client and the lender. We educate and sort through fine print so clients don't get financially rolled when shit hit the fan in their future. See shit fan scenario below...
Fast forward 2 years later. Life happens and they decided to split up and it's not amicable, so they need to break that mortgage now, sell and split. They find out their penalty is $13,000 and they now can't sell as they don't have enough equity to pay the realtor, lawyer and the bank penalty.
So what does YOUR mortgage penalty look like?
Short answer: 3-5% of your balance with Big Banks and 1-1.5% of your balance with Monoline lenders with FIXED rate mortgages. Variables mortgages are always 3 months interest only.
October 2018 they had a mortgage for $250,000 a 5 year fixed at 2.59% with payments at $1,119 with BIG Bank vs the the Brokers recommendation with a Monoline $1,111 - So $8 a month difference or $480 over 5 years.
December 2020 they are selling and breaking their mortgage.
Penalties are as follows:
Big Bank - RBC - $13,462
Monoline - MCAP - $1694
Big Bank - TD - $14,950
Big Bank - Scotia - $6,540
Monoline - First National - $2,200
You get the point. They range depending on ... well many factors! Hence why Mortgage Brokers are so important to assist in your decision making. Saving $480 over 5 years isn't worth the potential loss of $10,000!
Did you know that most mortgages only make it 3.8 year into their 5 year term? Why? Refinancing, divorce, sale, lower rate...you name it.
Why the BIG penalties? The Banks "DISCOUNT" YOUR RATE FROM THEIR POSTED RATES. That's the short answer.
Seriously check it out. Got to any Bank to their Fixed term mortgage rate area and you will see the POSTED rate is significantly higher than the rates they offer you - the CONTRACT RATE. Here is CIBC's as an example.
If you want the nitty gritty breakdowns A fellow broker did a long winded excellent post on this here .
If you had to break your mortgage today what would your penalty be? Try out this penalty calculator below: