This article in Moneyville in the Toronto Star, is a great piece about the mortgage penalties associated with breaking your closed mortgage, an issue that is very prevalent today. Most clients don’t anticipate the high amounts that they have to pay out in penalties when they decide to refinance or sell their homes, as these numbers are not standardized across the different lenders, nor are these figures disclosed at the time of signing.
Banks have always encouraged clients to go into five year fixed rate mortgage terms, yet the average time a Canadian will stay in a fixed mortgage term is 3.4 years. Now we know why the banks profit billions a year even during recessions and “credit crunches”.
As a homeowner or home buyer, keep the following tips in mind when shopping around for a mortgage or if you are considering refinancing your property:
Beware of closed or fixed-rate mortgages that will penalize you for leaving early. As we’ve said many times, a variable-rate or open mortgage is the way to go!
If you are adamant about taking a fixed mortgage, consider a 3 year term instead of the bank-promoted 5 year term. The future is uncertain and tying yourself up in such a long commitment can result in big penalties when you decide to break your mortgage.
Know your numbers! Find out if the rate that you’re being offered is a discounted rate and make sure you are aware of how the IRD (Interest Rate Differential) is calculated.
Take advantage of your pre-payment options and apply these to your mortgage before it gets discharged.
Talk to a mortgage agent to find the best mortgage strategies that will reduce the IRD penalty that you will have to pay and get you the right product that will help you pay your mortgage off faster.
These reasons and many more prove that as a consumer, you should be loyal to yourself first and commit to a variable rate mortgage so that you can be mortgage free faster. Remember, you have a choice.