Tag Archives: pre-payment penalties

Government Releases a ‘Mortgage Prepayment Code’

March 5, 2012

0 Comments

Yesterday, the federal government published a ‘Mortgage Prepayment Code‘ which basically guides all (federally regulated) lenders how they communicate the IRD (Interest Rate Differential) to borrowers.

Yay! This has been a long time coming. For years, banks and lenders have been obscuring penalty descriptions with vague, complicated formulas for calculating prepayment charges.

A link to the full ‘Mortgage Prepayment Code‘ can be found here http://www.fin.gc.ca/n12/data/12-025_3-eng.asp, but here’s a list of what lenders must now disclose to borrowers:

  • The formula for calculating the exact prepayment change (it has to be simple and not misleading), and an easy way to estimate penalties if there are numerous variables involved
  • A full description of all inputs/variables used in the formula (i.e. no more vague talk)
  • Information how how to obtain each of the inputs/variables
  • An example and/or worksheet to help consumers figure out their own prepayment penalty

On top of that, lenders also must annualy provide a description of the borrower’s available prepayment privileges, the exact dollar amount of their prepayment options, any explanations of why their penalties could change, fees associated with each prepayment option, and contact information for staff at the lending institution that are knowledgable about penalty calculations. The lending institution will also have to supply, upon request, a written statement with the prepayment penalty, a full description of the formula used and when the prepayment penalty quote expires. The lenders will even have to post calculators on their public websites to help determine “reasonable” (i.e. not thousands of dollars off) estimates of prepayment penalties.

Overall, a huge win for borrowers. Even as a mortgage specialist, it can be difficult to figure out prepayment penalties – when these changes come into place on November 5th, 2012, it will be a lot easier for the Canadian public to figure out the costs associated with prepaying their mortgage (or breaking their mortgage).

 

Tim

Tim is a mortgage agent in Barrie who specializes in helping first-time home buyers. He works with a variety of lenders and can help customize a mortgage with the best rates & options that fit the needs of each customer.

More Posts - Website

Continue reading...

The Best Mortgage Rate is Not Always the Best Option

January 9, 2012

1 Comment

In the mortgage world, there’s always a lot of talk about rate.  What’s the current best 5-year rate?  What’s the best rate I can get?  What’s the best rate you offer?

While rate is definitely an important part of the mortgage equasion (and we discussed a while back why term is also important), sometimes the “extras” that comes with different mortgage products can be worth a lot more than that extra 0.1% rate savings.  But when you actually do the math, a 0.1% savings on a typical 5-year mortgage is less than $15/month (which is less than $1,000 over the term of the mortgage).  Just one of the below extras could easily offset this savings:

  • Early payout penalties (especially important if there’s a chance you may have to break your mortgage early)
  • Low pre-payment penalties
  • Missed payment flexibility (some lenders will allow you to skip payments every once and a while if money is tight)
  • Portability (can save you a lot of money if you move to a new home mid-term)
  • Cash back (sometimes cash up-front to pay off high-interest debt is a better choice than a lower rate)
  • Pre-payment privileges (pre-payment privileges vary from lender to lender – if you plan on paying more on your mortgage than your regular payments, this can be an important part of your mortgage planning)

Different lenders come out with a variety of “extras” like the ones above that can make rate a little less important.  Obviously, with all things equal, a lower rate is better.  But sometimes, rate is not the be-all and end-all when it comes to deciding what best mortgage product is for you.  Have a qualified mortgage professional evaluate your current mortgage needs.  Once we understand your mortgage requirements, we can then help get you set up with the mortgage product that makes the most sense for you.

Tim

Tim is a mortgage agent in Barrie who specializes in helping first-time home buyers. He works with a variety of lenders and can help customize a mortgage with the best rates & options that fit the needs of each customer.

More Posts - Website

Continue reading...

The Cost of Borrowing

October 3, 2011

0 Comments

With the emergence of the Internet over the past couple of decades, more and more consumers are playing an active role in “rate shopping” for their mortgage.  Unfortunately, the “best rate” doesn’t always equal the best mortgage – there’s usually a big difference between the lowest rate and the lowest total cost of borrowing.  In fact, the interest rate is just one of the many factors that determines your total cost of borrowing.

There are numerous things that can turn a low rate into a high cost of borrowing:

  • Poor term selection (eg. in most cases, getting 3.39% on a five-year term will be better than getting 3.19% on a one-year term)
  • Unanticipated fees (for breaking your mortgage early, reinvestment fees, administrative fees to switch or port your mortgage, 100% clawback of cash-back if the mortgage is broken before maturity, etc)
  • Mortgage restrictions (can’t refinance within x months, pre-payment restrictions, can’t break mortgage in first x years, etc)
  • Numerous/high mortgage penalties (last week we talked about IRD penalties, penalties for pre-payments, penalties for early termination of your mortgage, etc)

Depending on your situation, the lowest rate may, in fact, be the best option for you.  But a lot of the time, the lowest rate can end up costing a lot more if you don’t know all the fees & penalties that could come along with that rate.  One of the main benefits of using a mortgage broker is that we know the products offered by each lender – the ups and downs of the rates and options for each mortgage – so that we can help you pick the best mortgage that fits your current situation and needs.  Sometimes, taking a slightly higher rate will save you tens of thousands of dollars, whereas a slightly lower rate could cost you tens of thousands of dollars.

I’m not saying don’t shop around on the Internet (I’m an Internet-junkie if there ever was one!), but make sure to ask the (usually FREE!) advice of a mortgage broker before deciding which rate, term and mortgage is best for you.

 

Tim

Tim is a mortgage agent in Barrie who specializes in helping first-time home buyers. He works with a variety of lenders and can help customize a mortgage with the best rates & options that fit the needs of each customer.

More Posts - Website

Continue reading...

What is an IRD (Interest Rate Differential)?

September 26, 2011

0 Comments

The world of mortgages and real estate is filled with an excessive amount of acronyms.  If you were to overhear some of our conversations, you would swear we were speaking a different language – LTV and PMI this, and IRD and ARM that, API, BPS, and it goes on and on.  While most people don’t really need to bother to learn what most of these mean, if you currently have a mortgage, one of the acronyms you should know  is IRD (Interest Rate Differential).  This is the charge that may apply if you pay off your mortgage prior to the maturity date, or pay the mortgage principle down beyond what you’ve set up as a pre-payment privilege.

Basically, if you’re going to break your mortgage early, the IRD more or less represents the profit the lender was going to make on your mortgage had you not broken it early – and it’s what you’re going to pay them so that you can break it early.  This penalty can be tens of thousands of dollars, so before you break your mortgage (whether it’s to refinance, to get a lower rate, or to buy a new house), you need to make sure you know what your IRD is ahead of time.

The IRD is calculated based on the amount you are pre-paying and an interest rate that equals the difference between the interest rate on your current mortgage, and a comparison interest rate that the lender would charge today to re-lend the funds out for the remaining term of your mortgage.  So if you have 3 years left on your mortgage, that comparison rate would be the interest rate the lender currently has for their 3-year term, or if you have 10 months left on your mortgage, they would usually round up to what their current 1-year term rate is.  Of course, just to keep it interesting for all involved, each lender has its own formula for calculating penalties (some round up, some round down, some seem pretty close to random), so the best way to find out what your current IRD is, is to simply call up your lender and ask.

While most variable-rate mortgages do not have IRD penalties (since a variable-rate mortgage is, well, variable, it always adjusts to current market conditions), most closed, fixed-rate mortgages have a pre-payment penalty that is the higher of 3-months interest or the IRD.

Wo what’s the best way to find out if it’s worthwhile to break your current mortgage for better rates or for a refinance?  Call your current lender and ask them what your IRD would be if you broke your mortgage today (they’re the ones who are going to charge the penalty – they’re the best ones to ask what that penalty will be), then call your favorite mortgage broker and let them figure the rest out for you.  😉  Once we know what your IRD is, we can let you know if it’s worth your while to break your mortgage right now, or wait until your IRD gets a little smaller.

Tim

Tim is a mortgage agent in Barrie who specializes in helping first-time home buyers. He works with a variety of lenders and can help customize a mortgage with the best rates & options that fit the needs of each customer.

More Posts - Website

Continue reading...