How The Penalty Is Calculated
TYPICALLY:
How The Penalty Is Calculated
Although your intention is not to break your mortgage within the term regardless of the product you choose it is very important to understand how penalties work because you never know what will happen within the term. Even though lenders use the same type of penalty calculation the way each lender determines the rate to calculate the penalty can differ considerably, which can result in a much higher penalty and sometimes substantially.
I had some clients referred to me whose current mortgage was with a major bank. They wanted to refinance their mortgage into a lower rate and at the same time access some equity for home renovations. I could offer them the better rate but the penalty was abnormally high based on their existing rate and mortgage amount which was less than $150,000. I told the clients to contact the bank rep and ask them how the penalty was calculated and at first they were sent some generic penalty information. After probing further they were told that they received a discount of 2.36% which worked against the clients.
Please access the following link which explains how penalties work and refers to the calculation used by the bank: http://www.theglobeandmail.com/report-on-business/video/video-drawing-conclusions/article24027597/
- For most fixed rate mortgages the penalty is the greater of three months' interest or interest rate differential, IRD for short.
- For most variable rate mortgages the penalty is ONLY three months' interest as there is NO interest rate differential component. Certain lenders may offer a lower rate and calculate the penalty differently, for example 3% of the balance.
How The Penalty Is Calculated
Although your intention is not to break your mortgage within the term regardless of the product you choose it is very important to understand how penalties work because you never know what will happen within the term. Even though lenders use the same type of penalty calculation the way each lender determines the rate to calculate the penalty can differ considerably, which can result in a much higher penalty and sometimes substantially.
I had some clients referred to me whose current mortgage was with a major bank. They wanted to refinance their mortgage into a lower rate and at the same time access some equity for home renovations. I could offer them the better rate but the penalty was abnormally high based on their existing rate and mortgage amount which was less than $150,000. I told the clients to contact the bank rep and ask them how the penalty was calculated and at first they were sent some generic penalty information. After probing further they were told that they received a discount of 2.36% which worked against the clients.
Please access the following link which explains how penalties work and refers to the calculation used by the bank: http://www.theglobeandmail.com/report-on-business/video/video-drawing-conclusions/article24027597/
