Best Mortgage Rate
This is the most difficult topic related to mortgages and it
will continue to be confusing until the laws in Canada are changed to require
consistency on how lending institutions charge their penalties.
Most lenders charge an early payoff penalty on closed mortgages
if the debt is paid prior to the maturity of the term. The lending institution
must describe the penalty they could charge on the mortgage document.
The most common penalty is:
The greater of three months interest penalty OR the interest rate differential.
In other words, whichever amount is the larger of these two figures will be
your penalty. Other kinds of penalties are listed below.
Three Months Interest Penalty
If you are paying off your mortgage before the maturity date,
most lending institutions charge three months interest penalty (or an interest
differential penalty).
Your present mortgage balance is multiplied by your current
interest rate and multiplied by three.
Interest Rate Differential
This usually means the difference between the interest rate on
your mortgage contract compared to the rate at which the lending institution
can re-lend the money.
For example:
If your mortgage has a balance of $125,000 at 9.25%, you have 2
years left to go and the current 2 year mortgage rate is 6.25%.
Then the lending institution will probably charge you – $125,000 X 24 months X
3% (9.25 – 6.25) = $7,266.21
However, just to further confuse the issue, the penalty above has not been
present valued. This is when a lender charges a lower penalty because you are
paying all of the ‘extra’ interest (in the example 3%) now, not over the
remaining term. Some lenders present value, other lenders do not.
Other Penalty Calculations
Methods of calculating penalties are as varied as the lenders’
imaginations! The following outline describes some penalties charged by
lenders.
Some examples:
1.
Greater of three months interest penalty OR
the interest rate differential.
2.
CMHC mortgages registered prior to July
1999 – during the first three years, the penalty is the greater of 3 months
interest OR interest rate differential. After three years of payments made on a
4 or 5 year term (or longer) the penalty is three months interest.
3.
CMHC mortgages registered after July 1999 –
CMHC mortgages will now have the same penalty clause as the institution lending
you the mortgage funds.
4.
Two months penalty interest (based on the
floating rate in effect at the time of payout) calculated on the outstanding
balance during the first three years of the term and no penalty charged at all
for the remaining years of the term.
5.
The mortgage cannot be paid out unless
there is an arm’s length sale – then the penalty is 3% of the outstanding
mortgage balance.
6.
The mortgage cannot be paid out unless
there is an arm’s length sale – then the penalty is the greater of three months
interest OR 3% of the outstanding balance.
7.
Same as above, but not more than three
months interest in years 4 and 5 of a five year term.
8.
For non-arm’s length sales – it is the
greater of three months interest OR interest rate differential to the bond rate
for the remaining term.
9.
For arm’s length sales – it is the greater
of three months interest OR interest rate differential to the current posted
mortgage rate for the remaining term.
Here’s More Confusion
·
Do not assume the same lender charges
penalties the same way for each type of mortgage. Examples 1, 4 & 5 above
are all charged by the same lender on different products.
·
Do not assume the penalty charges you
agreed to with the original mortgage document are the same when you renew with
the same lender. Their policies concerning penalty charges are always changing.
·
Do not assume the same wording means the
same calculation with different lenders. For example the term ‘interest rate
differential’ means very different penalty policies with different lenders. The
terminology is not used consistently.
·
Do not assume your legal representative or
real estate agent is familiar with all the different ‘twists and turns’ of
penalty charges.
There have recently been class action law suits against at least
two Canadian lending institutions over their practices regarding the
calculation of penalty charges. The law is still evolving regarding acceptable
practices for calculating penalties.
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us- https://www.raymondlesiw.ca/
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