Friday, 21 September 2012

Mortgage Penalties - 10 Useful Questions to ask your lender

Hi All,

I was undertaking some 'back reading' today and saw this useful article, about working out the penalties on fixed rate mortgages, from the Globe and Mail recently, and thought I would share it with you.

1. Is your fixed-rate mortgage penalty based on posted rates, bond yields or discounted rates?

The logic: Some lenders – including the Big Six banks – base penalties on posted rates, which can drastically inflate your penalty. Other lenders use bond yields, which can also cost you a small fortune, depending on bond performance. A few are even bold enough to use posted rates when calculating simple “three-month interest” penalties.

2. If I break the mortgage and stay with you, will you forgive a percentage of my penalty or apply unused prepayment privileges, to reduce my penalty?

The logic: More lenders are doing this as competition grows.

3. If not, can I make a prepayment a few weeks before breaking my mortgage to lower the balance used to calculate my penalty?

The logic: When determining a penalty, some lenders refuse to consider prepayments 30-90 days before you request discharge.

4. What term do you use to calculate the nearest comparison rate for an IRD penalty?

The logic: Some lenders use a shorter term than the nearest term, which can significantly increase your prepayment costs.

5. Can I increase my mortgage without a penalty? T

The logic: This is important if you ever upgrade your home or need additional funds.

6. If I sell my home and port my mortgage to a new property, how long can I take to close on that new property and still avoid a penalty?

The logic: Some lenders unreasonably require you to close your old and new home on the same day.

7. If I break the mortgage early, do I have to pay “reinvestment fees” on top of the penalty, or pay back any cash incentives that I’ve received?

The logic: Other things equal, why pay a reinvestment fee on top of your penalty? The latter answer is usually “yes.”

8. Can I get out of my fixed mortgage early if I pay a penalty?

The logic: Some “low frills” closed mortgages don’t let you out before maturity – no matter what – unless you sell your home.

9. Do you charge IRD penalties on your variable-rate mortgage, as opposed to the standard three-month interest?

The logic: Despite being highly unorthodox, a few lenders actually do this and it can cost you.

10. How long will you honour your IRD penalty quote?

The logic: This is relevant if you’re trying to discharge a fixed-rate mortgage while rates are dropping. Falling rates can increase your IRD penalty.

To read the full story, please view http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/ten-questions-to-help-you-avoid-mortgage-penalty-shock/article4545693/

It's quite a 'mine field', so my advice would be to contact your Mortgage Broker!

Kind Regards

Trish Cenci

Tel 250 864 1707