Mortgage refinancing carries stiff penalties
By Gordon Powers, Sympatico / MSN Finance
Interest rates are down sharply – maybe even as low as they’re going to get – which means your existing mortgage rate is likely higher than prevailing rates. Is this then a good time to renegotiate?
Maybe.
With a five-year fixed rate now lower than 4% in some spots, the savings can be significant – particularly if you’re still far away from paying things off. But while the improved interest rate you might get is tempting, it's important to calculate how much you'd pay in penalties and how long it will take to recoup the cost of refinancing.
First off, you’re going to take a big hit, known as the interest rate differential or IRD, to break your contract. Once upon a time, that simply meant giving up three months interest – in other words, a penalty of a little less than your next three regular mortgage payments.
In this market, however, skittish lenders are holding out for a stiffer penalty based on a formula that includes the size of the mortgage, the number of months you have left to run, and the difference between the current and existing rates – as well as a few company-specific charges since no two lenders calculate the IRD exactly the same way.
For instance, assuming the following:
- Mortgage balance: $100,000
- Rate on existing mortgage: 5.35%
- Term left to maturity: 24 months
- Available rate: 3.95%
The two possible results are either three months interest, approximately $1,340, or an IRD charge of closer to $2,800. Guess which one the bank will favour?
You do have some options, however. Depending on your mortgage terms, lenders will often let you pay down 10 or 15% of the original amount you borrowed first. By doing this, you’ll reduce the penalty proportionately but there’s no way to completely avoid it.
Have a mortgage broker run the numbers for you to see where you stand.
Posted by: Laura | Apr 16, 2021 11:04:16 AM
If you are selling your home soon, the best option could be a secured line of credit where your home is used as security. You need to have at least 20% equity in it but it beats having to pay penalties when you sell your home. With the market today, you don't know if your house is going to sell right away and in some places, it could be on the market for a year or more! Right now, many institutions offer this LOC for 3.5% so you are getting the lowest current interest rate and if rates rise in the future (it won't happen while we're in a recession or folks will start losing their homes which would be a disaster for our economy) you will have paid down the loan at the cheaper rate which means the slightly higher rate is on a smaller balance so it normally works out in your favour.
Posted by: Gills | Apr 16, 2021 2:12:37 PM
If you pay out your mortgage at one bank and finance it at another, they can only charge you the three month interest penalty.
Plus, you can work a deal with the new bank since they'll be trying to win your business.
NEVER stay at the same bank when you refinance; you can ALWAYS work a better deal by moving your mortgage.
Posted by: Henry | Apr 16, 2021 2:46:29 PM
Gills; you are incorrect; when you are in a contract, most banks will charge you the interest differential or 3 months interest whichever is the greater amount. If you are in a term longer than 5 years, the most a bank can charge you is 3 months interest after the 5 year period. Most people take terms of 5 years or less, so in todays market place, you would be stuck with the interest differential, whether you are moving to another mortgage company or not. Check with a broker to see whether it makes sense paying the penalty and negotiating a better rate.
Posted by: GP | Apr 16, 2021 3:02:36 PM
10 years ago, that was the case but now I'm afriad the three month minimum only applies to mortgages of five years or more -- a relatively small chunk of the market.
Posted by: Ken | Apr 16, 2021 3:29:51 PM
My mortgage also had a blended rate. This rate was about 0.5% less then my current 5 year rate. If I chose the blended rate I would pay no penalty. The five year term restarts but I would still have a slightly better rate.
Posted by: DJF | Apr 16, 2021 3:33:31 PM
IRD is a dirty way for lenders to retain clients. Comparison rate shopping is useless unless we know exactly what rate an existing lender uses when calculating the IRD. Are they using rates compared to terms of current mortgages and comparing the remaining term to maturity? Or is the lender using the bond rate as the comparative rate? Frustrating.
Posted by: Jane Graydon | Apr 16, 2021 4:55:44 PM
My mortgage penalty is $14,033.90 as of this week. November 25th, 2008 it was $2815.00. Yes, it has gone up over $11,200.00 in the past 4 1/2 months! SHOCKING! CRIMINAL! The banks should be ashamed! Mortgage bal. is $203,000 at 5.57% until July 1, 2021 with BMO.
Does anybody have any ideas about what I might do? I've already been in to see the branch manager. Does anybody in the bank have compassion or discretion or a heart or a conscience???
I'd be so happy to hear any ideas on what to do about this, including who in the government to talk to. Please help!
Posted by: Kae Bee | Apr 16, 2021 5:08:42 PM
Well if rates had gone the other way to 8% you'd be happy to have 5.57%. That's the risk you take when you LOCK in your mortgage. Mine is locked in at 5.35% so I too have a penalty over $13,000 to get out. Sucks but that's the way it is. My only consolation is in the grand scheme of things 5.35% is a decent rate when you look at where they've been over the past 10 years. Instead of paying the penalty, why not put the same amount against it as a lump sum payment.
Posted by: Jane Graydon | Apr 16, 2021 5:24:24 PM
Good idea, and I will try to apply the 20% prepaid they allow and then have them calculate the penalty. Thanks.
I lost my livelihood, like so many others, have been forced to put my home up for sale - not voluntary. What a shock when I discovered yesterday that the penalty had gone up from $2800 to $14,033.90. I had hoped to possibly salvage something when my home finally sells, but with penalties like this, it doesn't give me much hope, or anyone in my situation.
Posted by: Susan Smith | Apr 17, 2021 12:50:58 PM
I am an unemployed Presbyterian Minister and my husband who is quite a bit older is retired. We got a mortgage last year with Citifinancial with a huge interest rate. Our property is worth $129,000 and we took out a one year $82,000 mortgage on the property and boght on Aug, 18, 2008 while I was still in work. The renewal is up in July but nobody will look at us.
We were discharged from bankruptcy on Jul6 6, 2007 so it will be 2 years this year. The broker had said that we would be able to get a regular mortgage thsi year and advised us to take only a one year mortgage with Citifinancila. However, I have been in touch with the broker and he now says because I am unemployed no one will look at us even though we have $47,000 in equity.
The broker suggested that we take a open mortgage renewal wth Citi for now. I am hoping that I get a church soon. Please can anyone help me.
Posted by: jrh | Apr 17, 2021 10:16:03 PM
I dont know if I should post this but I had mortgages totalling about 850,000 locked in 5 year terms till 2012 - 5.25 - bank renewed at 4% with no penalty or charges for new 5 year terms
Posted by: Paul Fraser | Apr 19, 2021 11:41:01 AM
RBC Bank President Gordon Nixon - Salary $11.73 Million
$100,000 - MISTAKE (FISHERMEN'S LOAN)
I'm a commercial fisherman fighting the Royal Bank of Canada (RBC Bank) over a $100,000 loan mistake. I lost my home, fishing vessel and equipment. Help me fight this corporate bully by closing your RBC Bank account.
There was no monthly interest payment date or amount of interest payable per month on my loan agreement. Date of first installment payment (Principal + interest) is approximately 1 year from the signing of my contract.
Demand loan agreements signed by other fishermen around the same time disclosed monthly interest payment dates and interest amounts payable per month.The lending policy for fishermen did change at RBC from one payment (principal + interest) per year for fishing loans to principal paid yearly with interest paid monthly. This lending practice was in place when I approached RBC.
Only problem is the loans officer was a replacement who wasn't familiar with these type of loans. She never informed me verbally or in writing about this new criteria.
Phone or e-mail:
RBC President, Gordon Nixon, Toronto (416)974-6415
RBC Vice President, Sales, Anne Lockie, Toronto (416)974-6821
RBC President, Atlantic Provinces, Greg Grice (902)421-8112 mail to:greg.grice@rbc.com
RBC Manager, Cape Breton/Eastern Nova Scotia, Jerry Rankin (902)567-8600
RBC Vice President, Atlantic Provinces, Brian Conway (902)491-4302 mail to:brian.conway@rbc.com
RBC Vice President, Halifax Region, Tammy Holland (902)421-8112 mail to:tammy.holland@rbc.com
RBC Senior Manager, Media & Public Relations, Beja Rodeck (416)974-5506 mail to:beja.rodeck@rbc.com
RBC Ombudsman, Wendy Knight, Toronto, Ontario 1-800-769-2542 mail to:ombudsman@rbc.com
Ombudsman for Banking Services & Investments, JoAnne Olafson, Toronto, 1-888-451-4519 mail to:ombudsman@obsi.ca
http://www.pfraser.blogspot.com
http://www.corporatebully.ca
http://www.youtube.com/CORPORATEBULLY
http://www.p2pnet.net/story/17877
"Fighting the Royal Bank of Canada (RBC Bank) one customer at a time"
Posted by: Travellin'guy | Apr 20, 2021 12:57:37 PM
My wife & I paid off our mortgage about 20 years ago. We were late 20s at the time, and I calculated that by reducing our mortgage payments to zero was the equivalent of about a $18,000-a-year raise in terms of additional disposable income - no small potatoes! We did it by: 1) Focusing on our goal of mortgage freedom. We reduced or discontinued as much discretionary spending as possible, to save money to put down on our mortgage. Fewer dinners out, no elaborate holidays, no subscriptions for magazines that you read parts of only once, etc. Every little bit helps. 2) Be diligent in pursuit of your goal. It takes years, but if it's truly worth it you gotta stick with it. If you can't/won't stick with it, is it a goal or a fantasy? 3) Take every advantage of the early payment terms of your mortgage. Ours, for example, said that we could pay off a maximum of 15%, on one occasion in a calendar year. So if you plunked $3000 onto your mortgage in say, January, you couldn't drop your tax refund onto it when it arrived in March. But if you held onto your $3000, and put it with your tax refunds, you could put maybe $5000 DIRECTLY ONTO THE PRINCIPLE. This leads straight into 4) Keep your monthly payments at least at the same level - buy down the mortgage term instead. Remember, once your principle amount drops, your payments will normally be reduced. Too often people say "well, now we're only paying $1200 a month instead of $1500, so Hawaii/ Big screen/New car Here we come!" No, a single large payment can reduce your mortgage term by 8, 9 maybe 10 years - which means ultimately, a MUCH shorter wait till mortgage freedom. You're already used to paying, say $1500/month - don't drop it down. In fact, can you afford $1600? Maybe just $1550? Do it!
When we owed a final, I think $14,000, we'd managed to save a bit more than that, and paid the maximum allowable of $12,000 in late December. The rest was paid in early January, specifically to avoid the excess payment penalties out mortgage co. had in place. That had to have been the most satisfying feeling in the world!
Now the disclaimer: we did this while raising 3 kids aged 8 to 3 years old. We were in a rural location, about 15 km from the nearest city, so we had 2 cars for most of this time. My wife was a nurse, so while her wages weren't bad, they weren't amazing. In addition, for 2 years of this I was in school, and worked part time. For those of you who think that saving $3000 a year - hell, $300 a year!- is impossible, no, it's not. It does, however, require focus and discipline and persistence and the ability to delay gratification. Good luck to you!
Posted by: King V | Apr 20, 2021 4:45:13 PM
Posted by: Paul Fraser | Apr 19, 2021 11:41:01 AM
Don't complain about Nixon's salary - he opted out of $5,000,000 in bonuses in 2008.
Jane Graydon | Apr 16, 2021 4:55:44 PM
Do you expect the banks to suck up losses of $14,000 for everyone? Why not give you a new car instead? It costs banks money to lend money so when you decide to break your agreement, they lose. Prepayment charges or not penalties, they are lost cost recovery. In fact, you penalize the bank (and its shareholders) by losing them money. But, don't think you can stick it to them because you pay more to break than you save with a new rate. No matter how many brokers tell you otherwise, they are just trying to make a commission. And no matter how smart columnists might pretend to be, it is the exception that breaking your mortgage (or even blending rates) will work in your favour.
Posted by: Travellin'guy | Apr 20, 2021 12:57:37 PM
The best advice on here. People need to stop looking for tricks and stick to proven methods. Budget. Be smart. Don't spend what you don't have. Save for rainy days.
Posted by: Jane Graydon | Apr 16, 2021 4:55:44 PM
Criminal? Not even close. It's called a contract. Next time go variable.
Posted by: Denis | Apr 22, 2021 5:42:31 PM
How you did that? Could you share your story to us? I believe it will be very helpful!
Posted by: jrh | Apr 17, 2021 10:16:03 PM
I dont know if I should post this but I had mortgages totalling about 850,000 locked in 5 year terms till 2012 - 5.25 - bank renewed at 4% with no penalty or charges for new 5 year terms
Posted by: caj | May 6, 2021 1:53:28 PM
Posted by: jrh | Apr 17, 2021 10:16:03 PM
I dont know if I should post this but I had mortgages totalling about 850,000 locked in 5 year terms till 2012 - 5.25 - bank renewed at 4% with no penalty or charges for new 5 year terms
I'D LOVE TO KNOW TOO!!
My penalty has gone from 7,900 to over 11,000!! I can get a blended rate too so even though I will pay more interest I will still be ahead with the end result, as I won't have to borrow the penalty.