YOUR MORTGAGE PENALTY WAS HOW MUCH?
Years ago mortgage penalties were straight forward. Penalties were calculated on the
greater of three months interest or interest rate differential (IRD).
This is far from the case today. In fact it is utterly confusing, complicated and dangerous
because every bank seems to have their own formula. This is because there is no
required uniform formula which must be followed thus allowing the banks the ability to
take advantage of the borrower, while at the same time giving little or no ‘Disclosure’
either. What a shame. No, what a travesty.
Our current reality shows that penalty calculations have been manipulated such that
rarely is the penalty just three months interest. You guessed it. They have found a way
to charge the IRD, the ‘greater of’ most of the time.
The IRD penalty is based on 3 things.
1. The principle balance at the time you break it.
2. The ‘difference’ in the ‘contract’ rate of the original mortgage and the rate the bank
charges for the term closest to the time remaining on the mortgage. For instance if
there are 22 months remaining the bank will most likely charge based on a 2 year
term ‘comparison’ rate.
3. The number of months remaining on the mortgage term.
If the bank uses the ‘discount’ off the ‘posted’ rate, it widens the difference with the
‘comparison’ rate. This increases the IRD calculation which inevitably becomes the
‘greater’ of the two versus ‘three months interest only’.
Here’s an example of a 5 year fixed rate mortgage. Mortgage amount $300,000.
Contract rate 2.69%. Discount1.95% from a Posted rate of 4.64% giving a Comparison
rate 3.04%. Months remaining on term: 22. Differential is 1.6%. Penalty is $8,800.
Confusing isn’t it? Contract rate; Posted rate; Comparison rate are all used to confuse,
and here’s the ruse. The so called ‘Posted’ rate is in truth an illusory rate because all
lenders are looking to recover ‘lost interest’ when they reinvest the monies for the last
22 months of term in this example.
In fact penalty calculations should only be based on the differential between the contract
rate and the actual reinvestment rate = lost interest. If that were the case three months
interest only of $2,750. would apply. That’s a savings of $6,050. Most of our lenders use
this latter formula.
We are here to protect you from lending practices that will hurt you.
More coming on this subject next week.
Month: July 2015
We have new clients currently late on a bi-weekly mortgage. We cannot get them a prime mortgage. It’s truly disheartening but if your mortgage is not up to date, you are technically in default and no other mortgage company will consider you as a prime deal or best rates.
Since the beginning of this year, mortgage payment history has become part of the credit report. So now all lenders, credit card companies and financial institutions can see how you have paid your mortgage for the past 7 years. Many homeowners are under the wrong assumption that is no big deal to miss a payment especially if they are paying twice or four times a month. We are opposed to most homeowners paying their mortgages more than once a month. On bi-weekly payments, you have twice the chance of a missed payment showing up on your bureau and with weekly payments, that’s four times. Remember the increase in frequency on mortgages is in the bank’s favour and not yours. They can use your money to lend out and charge you interest while they do. YOU DO NOT PAY YOUR MORTGAGE DOWN ANY FASTER unless you are on accellerated payments. But the risk far outweighs any advantages. The biggest risk for you as the homeowner is a bank exercise power of sale proceedings on three missed payments and that can be only three on weekly payments.
It is much more prudent to increase your monthly payment by your prepayment options or just put a lump sum when you can. Most of our lenders allow 15 to 25% in prepayments. That way, you are in control and not your bank!
If you have had some late payments in the past, do not worry. Switch your payments back to monthly and start paying on time. And don’t forget to call us anytime. We are here to help.