Avoiding penalty shock starts before you choose a mortgage
Last week CBC’s Go Public reported on an Edmonton couple that was shocked to learn that TD Bank required them to pay a $17,000 payout penalty to end their mortgage early. Just days before, a BC mortgage broker posted a client’s payout statement from BMO on facebook showing a $26,000 payout penalty – that post went viral. In July, a BC Supreme Court judge certified a class action lawsuit against CIBC for unfair payout penalty practices.
What is common in all three of these cases of payout penalty craziness is that they could have been prevented with a little bit of foresight and some sound advice. Avoiding the often devastating surprise of a high payout penalty starts in the mortgage selection process. There are two primary things to consider to prevent payout penalty shock – the lender, and the type of mortgage.
Choosing the right lender is by far the easiest way to lower your payout penalty. Most people are surprised however, to learn that it is often their bank that will prove to have the highest payout penalties when it comes time to make a change, which is evidenced by the recent media coverage cited above.
The lenders with the most reasonable payout penalties are often wholesale lenders – who are funded by their big bank counterparts – but who may not have name brand recognition in Canadian households. These lenders include companies like First National, Merix Financial, Street Capital, and CFF Bank, all of whom are great lenders with rates and product features that rival the big banks.
Next to choosing the right lender, choosing the right type of mortgage can also make a significant difference when it comes time to payout your mortgage. For example, a variable rate mortgage will almost always have a smaller payout penalty than a fixed rate mortgage – usually 3 months interest. Similarly, shorter-term mortgages will also typically have lower payout penalties; there are exceptions to this rule however.
For example, there is a federal law requiring that mortgage terms over five years automatically revert to a three-month interest penalty at the five year mark. This means that if you have a seven or a ten year mortgage, you will be the subject of an interest rate differential calculation only for the first five years, after that you are pretty much free of having to worry about excess payout penalties.
Regardless of the lender or type of mortgage you choose, the only surefire way to prevent excessive payout penalties is to do your homework before you get your mortgage. Start by talking to you bank, then talk to an Accredited Mortgage Professional. Start the conversation by discussing payout penalties, eliminate the lenders who are excessive in their calculations, and then select the best rate from there. Selecting your lender in this manner will take the emphasis off of the interest rate and put it on what really matters, how much money your mortgage will actually cost you.
