According to a recent article in the Globe & Mail the following 10 questions would be very good ones to ask a mortgage advisor when discussing the best options for you regarding your home financing. They are:
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?
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.
Penalties are a realm where borrowers need knowledgeable advice. Sadly, many advisers are inexperienced with penalty calculations and give you a blank stare when you ask too many questions. (That's a good clue that you should deal with someone else.)
Fortunately, the Financial Consumer Agency of Canada is doing a noble job encouraging clarity with mortgage penalties. On March 5t it will go a step further by requiring banks to provide: annual information to help consumers calculate their penalty, written penalty statements upon request with clear calculation explanations, and access to exact prepayment penalty quotes by phone.
These initiatives will encourage fairer penalties and help homeowners minimize them, saving many individual Canadians thousands over time.
As always if you have any questions regarding this article or penalty calculations please feel free to give me a call.