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22 Sep

Posted Rate Trap

Mortgage Tips

Posted by: Timor Tranopulski

Dear customers, please be aware of the posted mortgage rate trap at the bank.
The danger is that posted rates will be used to calculate the penalty if you ever have to break your mortgage, costing you thousands of extra dollars.
With property prices rising, it’s crucial to get the lowest mortgage rate you can. However, the same level of importance should be addressed on mortgage penalties. Although it’s hard to imagine the need to break a mortgage that you do not have yet or the mortgage of your current property that you live in happily, however, it can happen. By statistic Canada, 6 out of 10 families break their mortgage within the first 38 months said roughly 60 percent of people adjust their five-year fixed rate mortgage before maturity, although many do it to refinance or move to a bigger house rather than to break the mortgage outright.
Mortgage penalties are straightforward if you have a variable-rate mortgage – expect to pay the equivalent of three months’ interest in most cases. With a fixed-rate mortgage, the penalty is set at the higher of three months’ interest or a calculation called the interest rate differential, or IRD. The must-ask question when negotiating a fixed-rate mortgage: Do you use discounted or posted rates to calculate these penalties? When using a professional mortgage broker, he will make sure that you are placed in with the best product with the lowest rate and penalties.
This is important because using posted rates can result in a much higher penalty. For some real-world numbers, let’s use the mortgage prepayment calculators all lenders now provide on their websites. They show penalties for paying all or a portion of your remaining mortgage balance (to find them, Google your lender’s name and “mortgage prepayment calculator” or at ratehub dot ca
Let’s use an example of someone who, three years ago, set up a $300, 000 five-year mortgage and has a balance owing of $250,000. Assuming an original mortgage rate of 3.39 percent with a discount of 1.5 percentage points, the mortgage prepayment calculators at several banks showed penalties ranging from $7,600 to $11,000 or so.
A check with some virtual lenders found penalties ranging from $1,500 to $2,500. These are very rough comparisons because lenders differ a fair bit in what information they ask you to supply. But you get the picture – the banks apply penalties with a sledgehammer.
As well as producing revenue for lenders, inflated mortgage penalties also help trap clients who might otherwise move their business to another lender. Imagine you want to refinance your mortgage or buy a bigger home and your bank won’t come across with a competitive rate. You say you’ll change banks, only to find out how prohibitively expensive it is to break your mortgage.
Mortgage brokers often have advantageous rates and a wide variety of products for their clients, and they can place clients with an institution with low penalty rates also. Why do so many people use their banks for mortgages instead of a broker, then?
Borrowers like the convenience of having their mortgage where they bank and being able to go into a branch to talk about their mortgage. However, they have no idea about a collateral charge. And many do not know about the existence of Mortage brokers (Many do not know that it is also a FREE service for the client, as we are paid by the bank we place the client with). A broker has access to your bank with an excellent understanding what will suit you, at the end of the day a broker goes through thousands of mortgage files while you maybe went through few in your lifetime.
When working with a broker you worry about the rate (A) and the approval (B), however, a professional broker has in mind more than A and B, he considers an excellent product from A to Z.