We keep seeing more and more articles in the news about outrageous mortgage penalties banks charge their clients.
So what’s the deal?
Well banks are in business to make BIG money, their fixed rates have standard penalties as all other lenders do, greater of 3 months interest or interest rate differential.
The 3 months interest is straightforward but interest rate differential is where the high penalty comes into play. Generally speaking the interest rate differential penalty is calculated based on your existing rate, current mortgage rate, and remainder of your term. The catch is banks also have posted mortgage rates which they use to calculate the penalty and this is where they make the money!
Here is a simple example of best vs posted rates penalty calculation.
Let’s assume you took a 5 year fixed term and have 36 months left on the mortgage term ( 3 years) your current mortgage rate is 3.5%, market rate is 2%, and the posted rate at the time you got your mortgage was 5%.
Standard Mortgage Penalty used by majority of Mono-Line lenders
Mortgage Balance x ((Contract Interest Rate – Current Market Rate) / 12) x term remaining = Penalty
100,000 x ((3.5% – 2%)/12) x 36 = $4,500
Now let’s compare with Posted Rate Mortgage Penalty used by major banks:
Mortgage Balance x ((Posted Rate when you obtained the mortgage – Current Market Rate) / 12) x term remaining = Penalty
100,000 x ((5% – 2%)/12) x 36 = $9,000
With the way a major bank calculates the penalty you will end up paying more, much more! Our examples shows the penalty is doubled just because we used posted rates to calculate the penalty.
We can help you avoid being gouged by the banks. With access to credit unions, trust companies, and mono-line lenders we are able to present options for you where the penalties are calculated based on the standard scenario and not the posted rate.
If you ever wondered why use an independent broker instead of a bank mortgage specialist, this is one BIG reason: here are articles from major newspapers about how banks make their money on mortgage penalties… Rate is not everything, read below: