What’s the most critical part of your mortgage? Most would point to the interest rate. Others might point to the type of mortgage, adjustable or fixed. And others might point to the pre-payment privileges. None of those are anywhere close to as important as the penalty.
The penalty on your mortgage is there for one reason – to discourage you from canceling your mortgage. The higher the penalty, the less likely you are to payout your mortgage. Think of the penalty as a giant combination lock, and the more numbers on the lock, the harder it is to crack. With some proper planning though, you can choose a mortgage that is easy to break.
But why would you want a mortgage with a lower penalty? The banker says I can port my mortgage anyway. Why would I need to get out of a mortgage? Well, the answer is simple; the less restrictive your mortgage, the more options you have. Choices can lead to savings and isn’t that what we all want when we choose a mortgage. We want the ability to pay off the mortgage as fast as possible. The ability to switch lenders and lower your rate mid-term are the most significant opportunities to save money on your mortgage. A lower penalty is the gateway to making those changes. The minute you have a penalty that is too expensive for you to leave a lender, you lose your bargaining power.
So how can you reduce your potential penalty? There are three basic things you can do. The first is to choose a variable rate mortgage over a fixed; the penalties are almost always cheaper. The second, if you do want a fixed, is never to get one at a big bank. Use a lender that specializes in mortgages and specifically low penalty mortgages. The third is to understand the penalty calculations. They are outlined in your mortgage document, and a good mortgage broker can explain them to you.
Don’t get caught in the trap of thinking the rate is the most critical factor in your mortgage. Sophisticated borrowers know that penalties are the most crucial part of a mortgage, and now so do you.
