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Scotiabank - Mortgage payout penalty

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  • Oct 3rd, 2014 3:32 pm
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[OP]
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Scotiabank - Mortgage payout penalty

I’m currently under a STEP plan at Scotiabank, on a 5-years closed mortgage signed in mid April 2014 at 3.09%.

Due to professional obligations, I might have to sell my house within the next year. Let’s say there is a 50% risk. I'm currently NOT using the line of credit, so no impact if I close it.

When looking at the charges and penalties using the calculator ( http://cgi.scotiabank.com/mortgage/Scot ... yment.html ), the amounts can vary drastically. Ex.: on the first 6 months (ending mid October in my case), the penalty seems to be only 1500$. After October, it’ll jump to close to 7000$ because the interest rate delta comparison jumps to a 4-years plan.

1) Is this calculation right, or if I’m misusing the calculator?
2) What would you do in my situation? Should I switch from closed (3.09% 5-years) to an opened (3.8% 5-years) plan NOW, or if there are other solutions & tweaks in order to make the penalty as low as possible if I sell let’s say in next December or January.

Thanks
14 replies
Deal Addict
Jul 23, 2014
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speak to your banker regarding your situation, they'll be able to give you options on how to reduce the penalty.
[OP]
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That's the problem. I spoke to 2 different agents. They both couldn't:
- tell me what would be the penalty after mid October. They can only provide the penalty if I cancel today
- understand why I would want to switch from closed to opened mortgage, telling me "there's no way the penalty would jump that high, that quickly"

:facepalm:
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Apr 28, 2014
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Xcessiv wrote:
Oct 2nd, 2014 12:56 pm
That's the problem. I spoke to 2 different agents. They both couldn't:
- tell me what would be the penalty after mid October. They can only provide the penalty if I cancel today
- understand why I would want to switch from closed to opened mortgage, telling me "there's no way the penalty would jump that high, that quickly"

:facepalm:
That's the problem with a fixed rate mortgage. The penalty can be either three months interest or the Interest Rate Differential (IRD), whichever is greater. In your case, it is probably going to be the IRD.

Many consumers have complained that the IRD calculation is hard to understand and results in significant penalty amounts. I would say you are best talking to your Branch Manager and explain your situation; from what I have heard, the penalty can be reduced.
[OP]
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Cerium398 wrote:
Oct 2nd, 2014 1:16 pm
That's the problem with a fixed rate mortgage. The penalty can be either three months interest or the Interest Rate Differential (IRD), whichever is greater. In your case, it is probably going to be the IRD.

Many consumers have complained that the IRD calculation is hard to understand and results in significant penalty amounts. I would say you are best talking to your Branch Manager and explain your situation; from what I have heard, the penalty can be reduced.
My understanding... Since the IRD is calculated on the differences between: signed rate & term (3.09% 5-years), versus current rate & term (3.10% 5-years), in my case it would be three months interest until mid October. I would them jump to a current rate and current term of below 3% 4-years, then the penalty would be much higher.

Nobody can confirm 100%. :|
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Apr 28, 2014
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Xcessiv wrote:
Oct 2nd, 2014 1:20 pm
My understanding... Since the IRD is calculated on the differences between: signed rate & term (3.09% 5-years), versus current rate & term (3.10% 5-years), in my case it would be three months interest until mid October. I would them jump to a current rate and current term of below 3% 4-years, then the penalty would be much higher.

Nobody can confirm 100%. :|
Like I said, I think this is a matter that requires escalation to a Branch Manager.

However, if it were me in your shoes; if Scotiabank can confirm what the penalty is today, and its close to $1500 like you said, and you can stomach it:

I would break the mortgage and re-finance into one with an open term. If you re-finance into another Scotiabank mortgage, they may or may not be able to work with you on the penalty.

Better to take the $1500 hit now, than wait and then it jumps to something ridiculous. Then you have to go twist the banks arm to reduce the penalty. Like you said, there is a 50% chance you will have to sell within the next year.
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Jul 23, 2014
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if you were to relocate, are you staying in Canada? Maybe you can dangle the carrot, you'll need a new mortgage when you relocate later, so there's an incentive.

I had a similar issue, although not relocating, I sold my house (due to unforeseen circumstances) a year after into my 4 year fixed. I had a penalty of around $6000, I told them that I was looking for a mortgage afterwards and my broker tried to think of any option. Unfortunately, she couldnt waive the penalty, but got an approval of a larger prepayment so I could pay down 20% (instead of normal 15%). It would bring it down the penalty to $4000. Also there was a chance that I'll be able to get a credit back once I get my new mortgage in place, sometime next year when the new house is completed.

The point is if a commission is in play, they usually do everything in their power to win your business.

Also, do what the above poster said. Tell them you're relocating within a year, dont tell them its a 50% chance. If you do a refinance, why not do a variable closed? That way, you get a lower rate plus and if you sell your house, you pay 3 months interest in penalty, and if you don't you get a decent rate for the remainder. If you go with a open mortgage, you're paying for that premium on a 50% chance that you might not use.

EDIT: my mortgage was also a STEP from Scotiabank
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Nov 19, 2002
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Remember that it's not signed rate, it's pre-discount rate. Which can be several points higher, leading to a much higher IRD than one would normally think.
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If you plan to buy a new house where you move you can port the mortgage. Scotia waived my penalty when I sold my house since I opened another mortgage with them.
Penalty Box
Dec 27, 2013
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Xcessiv wrote:
Oct 2nd, 2014 11:29 am
I’m currently under a STEP plan at Scotiabank, on a 5-years closed mortgage signed in mid April 2014 at 3.09%.

Due to professional obligations, I might have to sell my house within the next year. Let’s say there is a 50% risk. I'm currently NOT using the line of credit, so no impact if I close it.

When looking at the charges and penalties using the calculator ( http://cgi.scotiabank.com/mortgage/Scot ... yment.html ), the amounts can vary drastically. Ex.: on the first 6 months (ending mid October in my case), the penalty seems to be only 1500$. After October, it’ll jump to close to 7000$ because the interest rate delta comparison jumps to a 4-years plan.

1) Is this calculation right, or if I’m misusing the calculator?
2) What would you do in my situation? Should I switch from closed (3.09% 5-years) to an opened (3.8% 5-years) plan NOW, or if there are other solutions & tweaks in order to make the penalty as low as possible if I sell let’s say in next December or January.

Thanks
the system only calculates the penalty 2 weeks prior to discharge. They can't quote a penalty any further than that. The reason is that they can hold the penalty stable for 2 weeks pretty much. And yes it can change very drastically. Infact in one case the penalty went from $10,000 to $20,000 over night for a client. They ***** a brick. That's why its a very grey area and hard to get perfect quotes on this because the IRD calculation is like impossible to calculate and makes no sense to anyone.

Without knowing how much your mortgage is, it's hard to tell you if it's right. I will tell you right now though, if your mortgage is 3.09, 5 year fixed, on anything greater than 200,000 and you only just signed in April of 2014, your penalty will be a minimum of $3500.

Also, you cannot switch from a fixed rate mortgage to an open mortgage without paying a penalty. If any banker told you this they are incorrect and you will be in for a surprise when you go in to see them.


Do you have free equity in the equity plan? if you do, you need to setup a line of credit/etc and make the maximum prepayment before payout. It's kind of a grey area, sometimes they will allow you to calculate the prepayment before payout and let you benefit from the penalty, sometimes they wont. So it's good to just do it yourself before you sell if you are sure.

lastly, porting the mortgage is an option, but youll pay the penalty up front and get it back later. I think you have about 6 months to decide and the branch manager can probably push it out to 9 months - make sure you get this in writing either in email or paper.
Penalty Box
Dec 27, 2013
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Can you post us all the relevant numbers?

thanks
[OP]
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daivey wrote:
Oct 2nd, 2014 7:53 pm
Do you have free equity in the equity plan? if you do, you need to setup a line of credit/etc and make the maximum prepayment before payout. It's kind of a grey area, sometimes they will allow you to calculate the prepayment before payout and let you benefit from the penalty, sometimes they wont. So it's good to just do it yourself before you sell if you are sure.
Yes, and they proposed the same over the phone.
daivey wrote:
Oct 2nd, 2014 7:53 pm
lastly, porting the mortgage is an option, but youll pay the penalty up front and get it back later. I think you have about 6 months to decide and the branch manager can probably push it out to 9 months - make sure you get this in writing either in email or paper.
I'd build my next house myself, and I know that Scotia doesn't support that.
[OP]
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208k mortgage renewed in mid april at 3.09% (which includes a 1.6% discount).

Current balance is ~200k.

55 months remaining.

If we use their calculator: 1545$ that would jump to 6625$ within the next 2 months.

They also told me the same thing over the phone.
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Scotia does have a construction financing product. Let them know that you will commit to them on that product, and I am sure they will give you some sort of break on the mortgage penalties.

If not, tell them you will use TD's construction financing product.

Xcessiv wrote:
Oct 2nd, 2014 8:50 pm
Yes, and they proposed the same over the phone.

I'd build my next house myself, and I know that Scotia doesn't support that.
Kevin Somnauth, CFA
Mortgage Broker - Mortgage Architects (#10287) and Real Estate Salesperson - Century 21 Innovative
President's Club Award Winner At The Mortgage Architects
[OP]
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CdnRealEstateGuy wrote:
Oct 3rd, 2014 1:25 pm
Scotia does have a construction financing product. Let them know that you will commit to them on that product, and I am sure they will give you some sort of break on the mortgage penalties.

If not, tell them you will use TD's construction financing product.
The only issue with this approach is that I'd have to wait until I sell before paying the penalty; by that time it'll have jumped to 6K+$. If I switch to another type of mortgage now (at a 1500$ penalty), then sell the house in let's say 1 or 2 months, I guess it would be harder to get some sort of break on the penalty?

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