Brampton and the GTA are deep in the competitive spring real estate market! Mortgages are always competitively priced in the spring, but this year we’re seeing an unusual rate situation. Fixed-rate mortgages are very competitive and the most popular option, while variables are overpriced. Ten-year mortgages at good rates are also being aggressively promoted. If the market is saying go fixed, then it’s more important than ever to look at the fine print because the penalty to get out of your mortgage should be factored in your decision of which fixed-rate mortgage to take.
Why? Life happens and sometimes you need to get out of your mortgage! It’s impossible to plan for things like losing your job, illness, divorce, relocation, or any number of other personal matters. Or when much better mortgage rates comes along. At any time, your needs and the market can shift and the last thing you want is a painful penalty to get out of your mortgage. That’s why I discuss early payout penalties with my clients before we finalize their mortgage plan. No one wants these types of situations to happen, but when they do, there is so much relief knowing you have a cost-effective way to get out.
To get out of your mortgage early, you’ll pay the greater of 1) three months’ interest, or 2) the interest-rate differential (IRD). With the IRD, your mortgage lender is looking for you to pay the equivalent of what they will lose by letting your out of your mortgage and lending the money at current rates. Not all lenders calculate IRD the same way, and the differences can be as much as tens of thousands of dollars. Yes, tens of thousands of dollars!
Attracted to those 10-year mortgages being advertised? Think again. If you break a 10-year mortgage say at year 3, the IRD penalty will be on 7 years and that can be a substantial amount of money. While no one plans to break their mortgage, who can predict what will actually happen 3 years out?
The bottom line is that early payout penalties are not all the same and they matter with fixed-rate mortgages. When choosing between mortgages, you need to compare and understand how the early payout penalty will be calculated. And this is where I come in. I have this information at my fingertips so I know on any given day which lenders have the most fair prepayment penalties. In fact, every single day I counsel my clients in Brampton and the GTA on how they can best avoid painful penalties!
