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.