Real Estate

Is my bank being dishonest an mortgage break penalties

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  • Oct 31st, 2020 2:31 pm
[OP]
Newbie
Feb 6, 2019
70 posts
17 upvotes
Bc

Is my bank being dishonest an mortgage break penalties

Im with envision and got a 3.4 for 5 year.
I got it in may 2018. Its up
After talking to agents on here they have 1.89 for 5 fixed. So i emailed my bank to find out what the penalty would be (because the contract does not show it) and was told an amount that does not make any sense.
I get the 3 month interest but bring penalized for having a 30 year?

“when your mortgage is amortized longer than 25 years and also when the property is valued at more than 1 million there is a .20% premium added to the mortgage rate to mitigate the risk of the longer term and if the market had a down shift in value. “

Anyone else experience this?
36 replies
Sr. Member
May 3, 2013
686 posts
286 upvotes
Toronto
It's been a while since I looked at mortgage penalties... I'm not sure if that "0.20%" statement makes sense for mortgage penalties, it makes more sense in the context of applying for a mortgage. The penalty for breaking a mortgage can be huge. If you got your mortgage May 2018 for 5 years, you have about 2.5 years left. Your penalty would be calculated using interest rate differential, typically using posted rates. 3.4% was probably a discounted rate, but if it's not, I would estimate your penalty to be in the ballpark of (3.4% - 1.89%) * [mortgage balance] * 2.5.
Jr. Member
User avatar
Jun 3, 2019
175 posts
153 upvotes
GTA
I don't think the 0.20% that OP mentions is the penalty per se, but a premium that was added to his rate because of the longer amortization and property value over $1 million (which is common due to the restricted mortgage rules that came out in 2017). For how IRD (interest rate differential) penalties are calculated - https://dominionlending.ca/news/interes ... calculate/

Method “A” -Posted Rate Method – Generally used by major banks and some credit unions

This method uses the Bank Of Canada 5 year posted rate to arrive at the formula to calculate the penalty. It also considers any discounts you received. These are the ones you will commonly see on their websites or when you first walk into the Bank or Credit Union. Now, rarely does anyone settle on that rate-there is a discount normally that is given. This gives you the actual lending or contract rate. When this method is used, you will be required to pay the greater of 3 months interest or the IRD. What that looks like is:

Bank of Canada Posted Rate for a five-year term: 4.89%
You were given a discount of: 2%
Giving you a rate of 2.89% on a five-year fixed term mortgage.

Now you want to exit your contract at the 2-year point, leaving 3 years left. The posted rate for a 3-year term sits at 3.44%. The bank will subtract your discount from the posted 3-year term rate, giving you 1.45%. From there your IRD is calculated like so:

2.89%-1.45% =1.44% IRD difference x3 years=4.32% of your mortgage balance.

On a mortgage of $300,000 that gives you a penalty of $12,960.

Method “B”-Published Rate Method – Generally used by monoline (broker) lenders and most credit unions

This method is more favourable as it uses the lender published rates. Generally, these rates are much more in tune with what you will see on lender websites and appear to be much more reasonable. Again, let’s look at an example.

Your rate: 2.90%
Published rate: 2.60%

Time left on contract: 3 years

Equation for this: 2.90%-2.60%=0.30% x3 years=0.90% of your mortgage balance. A much more favourable outcome. On a $300,000 mortgage that would equate to only $2,700.

Daniel49, if the response you received from your lender was jaw-dropping then unfortunately it's IRD penalty and there's really nothing you can do. Your broker should have gone over this with you about the potential penalties you'd have to pay should you break your mortgage. The penalties get lower the longer you are into your 5 yr term so maybe revisit this idea when you are in your last year of the term, if possible.

Be careful with any advertised rates during your search as they're most likely the lowest rate reserved for 'buyers' with less than 20% down, under $1 million home value, with 25 yr am, with good credit rating and sufficient income vs debt ratios. Refinance rates are slightly higher similar to buyers with over 20% down.
Realtor® & Mortgage Agent
[OP]
Newbie
Feb 6, 2019
70 posts
17 upvotes
Bc
I was told that it would be 11,600. 2 weeks ago it was lower. I dont see how this can be legal. To just throw out numbers when i never signed a contract that says they could charge whatever they feel. They are ignoring all my emails asking where they came up with this amount too.

Im at a 3.4 and i m looking at 1.89. When i signed up they were not doing me any favours. All banks were in the 3.4 range.
Member
Feb 5, 2015
396 posts
473 upvotes
Toronto
Daniel49 wrote: I was told that it would be 11,600. 2 weeks ago it was lower. I dont see how this can be legal. To just throw out numbers when i never signed a contract that says they could charge whatever they feel. They are ignoring all my emails asking where they came up with this amount too.

Im at a 3.4 and i m looking at 1.89. When i signed up they were not doing me any favours. All banks were in the 3.4 range.
you chose the fixed rate of 3.4, if the rates had gone up you wouldn't have been complaining.
and you obviously signed a contract, otherwise how did you get a mortage?
the penalty changed because the rates droped a little bit, so it differential is bigger.

you have to calculate the interest rate differential (IRD).
calculation is (3.4-1.89)/12 = .00125

.00125 * mortage balance * months = $11600 in you case (the IRD)
[OP]
Newbie
Feb 6, 2019
70 posts
17 upvotes
Bc
It’s not on the contract.
The 1 800 agent even admitted that over the phone.
Im with envision. I’m just trying to get a lower rate on my mortgage and try to take advantage of the lower rates just like everybody else. And I don’t have a problem paying a penalty. I just don’t understand where they’re coming from with these extra amounts.

This is what I received recently after days of trying to get a hold of someone. Is it me but I can’t see where the penalty is coming from either. What someone Calculated here earlier makes more sense though!
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Sr. Member
User avatar
Aug 20, 2020
875 posts
142 upvotes
Scarborough
Daniel49 wrote: It’s not on the contract.
The 1 800 agent even admitted that over the phone.
Im with envision. I’m just trying to get a lower rate on my mortgage and try to take advantage of the lower rates just like everybody else. And I don’t have a problem paying a penalty. I just don’t understand where they’re coming from with these extra amounts.

This is what I received recently after days of trying to get a hold of someone. Is it me but I can’t see where the penalty is coming from either. What someone Calculated here earlier makes more sense though!
you can do the math...

higher of ((3.44%-2.04%)/365*$315,177*943) or $2,711)
Neil Joseph
Mortgage Agent, Broker Lic #10530
Member
Feb 5, 2015
396 posts
473 upvotes
Toronto
Daniel49 wrote: It’s not on the contract.
The 1 800 agent even admitted that over the phone.
Im with envision. I’m just trying to get a lower rate on my mortgage and try to take advantage of the lower rates just like everybody else. And I don’t have a problem paying a penalty. I just don’t understand where they’re coming from with these extra amounts.

This is what I received recently after days of trying to get a hold of someone. Is it me but I can’t see where the penalty is coming from either. What someone Calculated here earlier makes more sense though!
makes perfect sense, the penalty is 3 months or IRD which ever is higher.

3.44 - 2.04 = 1.4% interest difference

$315177 * .014/365 * 943 = $11399.9089

so 11400$ is the right amount.
[OP]
Newbie
Feb 6, 2019
70 posts
17 upvotes
Bc
OK now that that is clarified.. is it worth it paying the penalty to get the lower rate. My Whole goal is to get a lower mortgage rate.

Or is everybody waiting because the rates are going to go even lower..
Sr. Member
User avatar
Aug 20, 2020
875 posts
142 upvotes
Scarborough
Daniel49 wrote: OK now that that is clarified.. is it worth it paying the penalty to get the lower rate. My Whole goal is to get a lower mortgage rate.

Or is everybody waiting because the rates are going to go even lower..
As rates go down, your penalty will also increase depending on how much lower your lender brings down the rate. if your lender brings down the rate more than the general fall then your higher penalty will eat the savings; if lower then your savings will be higher! And vice-versa.. It's difficult to predict changes in rate; even more to figure out how much your specific lender will change!

You can switch to 1.75% variable (Prime minus 0.70%) or 1.89% fixed 5-year term
Neil Joseph
Mortgage Agent, Broker Lic #10530
Sr. Member
Aug 3, 2017
818 posts
623 upvotes
Daniel49 wrote: OK now that that is clarified.. is it worth it paying the penalty to get the lower rate. My Whole goal is to get a lower mortgage rate.

Or is everybody waiting because the rates are going to go even lower..
Run the math. My 11:30pm math in my head is that you’ll save -4,500/yr if you get a rate that is 1.5% lower and you have 2.5 years till renewal. Given that comes out to ~11,500 and you can likely renew up to six months early without penalty, I would say it isn’t worth the paperwork (and potentially other fees). That said, a good broker might manage to save you something if you can secure a rate that is even lower than the 1.5% savings I quoted above.
Deal Addict
Jan 26, 2016
2142 posts
2152 upvotes
Toronto, ON
They might also offer you an early renewal offer at lower rate if you call them and let them know you are thinking of breaking your mortgage. Something to try.
[OP]
Newbie
Feb 6, 2019
70 posts
17 upvotes
Bc
I tried. I contacted them and there was no help at all. Not only that they only offered me at 2.04.
Sr. Member
May 3, 2013
686 posts
286 upvotes
Toronto
Daniel49 wrote: OK now that that is clarified.. is it worth it paying the penalty to get the lower rate. My Whole goal is to get a lower mortgage rate.

Or is everybody waiting because the rates are going to go even lower..
Who knows if rates will go lower. But it's rarely worth trying to get a lower rate. Simple reason is because based on IRD calculation, you need to pay the penalty to the lower rate, to get the lower rate. That's like saying "I want to pre-pay the interest today, so I can continue paying interest at a lower rate". If you do have that kind of cash to pay the penalty, why not increase the payment so that more principal is paid off resulting in lower interest overall?
Deal Addict
Jan 26, 2016
2142 posts
2152 upvotes
Toronto, ON
Daniel49 wrote: I tried. I contacted them and there was no help at all. Not only that they only offered me at 2.04.
So did they offer to break free of penalty?

I had a similar situation with Lendwise who were giving me the offer to stay at lower rate. I didn't because I got a lower offer elsewhere but got lucky that their internal rate hadn't dropped yet.

But I bet the institution would prefer you stay for another 5 years as opposed to you paying the penalty to break.
Deal Addict
Jan 26, 2016
2142 posts
2152 upvotes
Toronto, ON
realtorhome wrote: Who knows if rates will go lower. But it's rarely worth trying to get a lower rate. Simple reason is because based on IRD calculation, you need to pay the penalty to the lower rate, to get the lower rate. That's like saying "I want to pre-pay the interest today, so I can continue paying interest at a lower rate". If you do have that kind of cash to pay the penalty, why not increase the payment so that more principal is paid off resulting in lower interest overall?
I got very lucky with Lendwise, as I got a rate from ThinkFinancial and Lendwise was very slow to drop their internal rates so my IRD was just the 3 months interest even though my rate was 3.3%.
[OP]
Newbie
Feb 6, 2019
70 posts
17 upvotes
Bc
Okay its 11,400 to break from my bank. Who....wont do a thing for incentive. (Im at 3.4) 399,900 mortgage. 2.5 into a 5 year...

So a broker is currently trying to get me a 1.8 At my requested 30 year 5 year fix.
WHICH would lower my payments from 1950 to
About 1500. Savings of roughly 450 a month.

So calculations is what i see. Correct me if Im wrong.
450 X12= 5400 x5= 27000
27000-11400
Savings of 15600.
So the penalty is paid off in roughly 2.5 years. And i can if i choose roll that extra 450 a month into the mortgage as an extra payment this lowering the interest more.

Now I see nothing but benefits. Also my broker says some of the banks have incentives of cashbacks. Up to 3000. Is there anything Im missing that i should look at before i jump ship to another bank.
Deal Fanatic
Jul 4, 2004
6931 posts
3523 upvotes
Ottawa
Daniel49 wrote: Okay its 11,400 to break from my bank. Who....wont do a thing for incentive. (Im at 3.4) 399,900 mortgage. 2.5 into a 5 year...

So a broker is currently trying to get me a 1.8 At my requested 30 year 5 year fix.
WHICH would lower my payments from 1950 to
About 1500. Savings of roughly 450 a month.

So calculations is what i see. Correct me if Im wrong.
450 X12= 5400 x5= 27000
27000-11400
Savings of 15600.
So the penalty is paid off in roughly 2.5 years. And i can if i choose roll that extra 450 a month into the mortgage as an extra payment this lowering the interest more.

Now I see nothing but benefits. Also my broker says some of the banks have incentives of cashbacks. Up to 3000. Is there anything Im missing that i should look at before i jump ship to another bank.
I do not believe your logic is correct.

First, you are comparing the monthly savings over 5 years but you only have 2.5 years left on your current mortgage. That calculation is only correct if in 2.5 years, the rate is back up to 3.4% (which is certainly possible) but it's also possible that in 2.5 years, the rate will be 2% in which case in 2.5 years, your payment will go down when you renew. You really need to look at what you'll be saving over the next 2.5 years (and really 2 years as you might be able to renew 3-6 months early without penalty)

Second, it sounds like you are comparing your current payment with the payment of a new 30 years term. I do not know the details of your current mortgage but it's very likely you have less than 30 years remaining on your amortization. Obviously if you pay a loan over a longer period of time, your payments will be less. If you had 300 year amortization, you could probably get your payment down to $200/month but you wouldn't be saving $1750/month; you'd be paying $1750/month less but would have to pay that amount for 10X longer.

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