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30 November 2011

Calculating Interest Penalties

November 28, 2011

Penalty Calculations—The Missing Pieces

When a Certified Financial Planner (CFP) can’t figure out how to calculate his mortgage penalty, it’s got to be really tough for Joe Borrower.

Globe & Mail columnist Ted Rechtshaffen, a CFP, recently wrote about this very topic. He says: “My mortgage breakage cost truly is a mystery…I have read my mortgage contract…It can’t be found in the fine print.”

Like many banks, his (TD Bank) explains how to calculate its penalty, but people have to deduce the numbers to plug into the formula themselves.

Those numbers include:

  1. The contracted interest rate (easy enough)
  2. The posted rate at origination (not as easy)
  3. The months left on the term (easy)
  4. The relevant comparison rate (not as easy)
  5. The current mortgage balance

To confirm these numbers, the borrower generally has to call his or her lender.

Wouldn’t it be nice, however, if you could log into your lender’s website and get this information with one click? It would, but lenders would much rather you call them for it. That way they can try to sell you a new mortgage.

A key point Rechtshaffen makes is that some lenders go out of their way to muddy the waters with respect to mortgage penalty calculations. They do that by:

  • Not including certain inputs for calculating your penalty in their mortgage contracts (like the posted rate); and/or,
  • Not telling you where to get the inputs on your own; and/or,
  • Not clearly explaining (with examples) which term to use when determining your comparison rate; and/or,
  • Writing penalty explanations in language that almost requires a law degree.

Penalty calculation shouldn’t be this cryptic. CAAMP says that 47% of people who refinance before maturity have to pay penalties. (It’s actually more than that if you include refis with blended rates [which have penalties built in].)  So it’s not like this is some infrequent obscure need that borrowers have.

Lenders who believe they have their customers’ best interest at heart should provide a web page that clients can log into. It should provide an instant penalty quote, with a comprehensible explanation of how that penalty was calculated, showing the math.

RBC has a semi-workable solution with its penalty calculator. Unfortunately, you have to fill in the blanks yourself and few people will know what to enter for things like the “Discount off posted rate.”

In any event, one of the nice benefits of not getting a big bank mortgage is that your penalty is often based on discounted rates instead of posted rates. That often saves people hundreds or thousands of dollars. It’s even more meaningful given that most people break their five-year fixed terms in 3.5 to four years on average.



Sidebar:  Be aware that some smaller lenders (like Industrial Alliance, Bridgewater Bank, etc.) have more complicated penalties, sometimes based on bond yields.

At times, those penalties can be even more painful than a big bank penalty.

This all goes to show the importance of discussing penalty policies with your mortgage planner…before settling on a lender.

Rob McLister, CMT

Posted at 12:27 PM in Mortgage Tips & Advice | Permalink




23 November 2011

November 22, 2011 - Residential Market Update





Have a great day!!


Lisette Amalfi, AMP




First National Financial LP




Residential Market Update



Canada Mortgage Bonds








Canada Housing 5 yr : 1.75%





Market Commentary


Five year bond yields have been relatively stable over the last week and generally positive news out of North America clashes with sovereign debt concerns in the eurozone.

The positive North American data includes better than expected Retail Sales, Housing Starts, Building Permits, Initial Jobless Claims (all for the US), and higher than expected inflation and Manufacturing Sales for Canada. The good showing in the US has been soured somewhat as the congressional "Supercommittee" that was supposed to find ways to cut the deficit over the next ten years announced this week that they have failed, but nobody should be surprised about that.

This is in contrast to the situation in Europe where the outlook has been dominated not by real economic data, but by market sentiment which has increasingly shunned the bonds of any government other than Germany. The potential for a larger crisis in Europe has kept a lid on rates everywhere (and caused equity markets to sell off quite a bit), while credit spreads continue to remain wider than they have in the recent past, meaning that the gap between fixed mortgage rates and government bonds remains larger than normal.

Market Commentary



Financing Tips


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October 2011: Monthly Indicator Recap



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For mortgage professionals, staying ahead of the curve is essential. In a constantly changing environment, understanding relevant housing data and economic indicators is vital to developing your business while offering the best service to your customers. Each month, Canada Guaranty provides mortgage professionals with a Monthly Indicator Recap, a brief report highlighting key indi cators affecting the current mortgage and housing market.

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Presented below are the figures for the month ending October 31, 2011.

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(vs. last month)


Volume of MLS® Home Listings

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Volume of MLS® Home Sales

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Average MLS® Sales Price

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(vs. last month)


Unemployment Rate
(October 2011)

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(August 2011)

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Retail Sales
(August 2011)

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Consumer Price Index
(September 2011)

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(Year-to-year, September)




(vs. last month)


Prime Rate**

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5 Year Fixed Posted Mortgage Rate***

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MLS® is a registered certification mark owned by The Canadian Real Estate Association.
* Seasonally adjusted month-to-month results; Source:  The Canadian Real Estate Association
** Source: Statistics Canada
*** Source: RBC

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Additional reports may be found on the Canada Guaranty website by clicking on: Monthly Indicator Recaps



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1 November 2011

Variable or Fixed



Variable or fixed? It’s no contest


Globe and Mail


Tue, 01 Nov 2011


 Rob Carrick


Numbers from mortgage brokers show that variable-rate mortgages had about one-third of the market as of this past spring.


Fixed-rate mortgage is now your best bet: Not only has the prime rate dipped, but banks have snuffed out variable-rate discounts.


Go fixed rate if you’re arranging or renewing a mortgage, and think hard about the four-year term. If you take in all the recent developments in the mortgage market, this is the most logical strategy.


Variable-rate mortgages are being sold at the prime rate in many cases right now, which is 3 per cent. The traditional discount off prime? Snuffed out by the banks. They’ve decided they aren’t making enough money from discounted variable-rate mortgages, so goodbye discount for the most part. If you shop around, maybe you’ll get 0.2 of a point off prime.


Now for the fixed-rate alternative. Global economic uncertainty and sluggish growth mean you’ll pay in the area of 3 per cent for a four-year term. This explains why veteran mortgage broker Peter Majthenyi has pretty much given up on variable-rate mortgages.


“For 10 years, I’ve said don’t waste your money on a fixed-rate mortgage,” Mr. Majthenyi said. “Today, I just cannot in good conscience put a borrower into a 3-per-cent variable when for the same rate I can put them in a four-year fixed.”


Mr. Majthenyi calls this a “temporary break” from variable-rate mortgages. He’ll see what happens when today’s four-year terms expire. Meantime, he’s gone from writing about 98-percent variable-rate mortgages a year ago to virtually zero now.


Numbers from the Canadian Association of Accredited Mortgage Professionals (mortgage brokers, to put it in English) show that variable-rate mortgages had about one-third of the market as of this past spring, compared to 21 per cent four years ago. Interest in variable-rate mortgages was as strong as ever going into the summer as a result of an uncertain global economic outlook that was expected to keep interest rates low. Variable rate mortgages could be had back then for 2.25 per cent, which represented a discount off prime of 0.75 of a point. Four- and five year fixed-rate mortgages would have cost roughly 3 to 3.5 per cent, and that included a strong discount.


This was an ideal environment for variable-rate mortgages. The prime rate, used by lenders as a reference for many of their loans, was low and expected to stay that way for as long as it took for the global economic mess to resolve itself. The prognosis was for continued savings versus a fixed-rate mortgage.


Then came two developments that led to Mr. Majthenyi’s 180degree turn against variable-rate mortgages. One, the cost of fixed rate mortgages fell a little as a result of the stock market uproar in August and September. Here’s how that worked: Money flowed out of stocks and into bonds, which set the trend for mortgage rates. When a bond’s price rises, its yield falls. And so, as bond yields moved lower in the late summer, so did rates on fixed term mortgages.


The second development was a decision by the big banks to clamp down on discounts given to customers going variable. “Bottom line, the banks have been stuck with too many variable-rate mortgages that are not profitable,” Mr. Majthenyi said. “How do they make them more profitable? They have to increase their profit on each mortgage.”


A few mortgage brokerage firms now advertise variable-rate mortgages at 2.8 per cent, or prime minus 0.2 of a point. But Mr. Majthenyi said many of the big lenders he deals with as a broker are now at prime. Looking ahead, he sees the market settling into prime plus or minus 0.2 for variable-rate mortgages.


You may still be able to save a token amount with a variable rate mortgage over a fixed-rate mortgage with a term of four or five years. But it’s not hard to imagine the advantage of the variable rate disappearing in a year or so as the economy rallies. Then, you could be looking at a long period of rising rates.


So get over any ideas you have about variable-rate mortgages being cheap enough in the here and now to overlook the risk posed by future rate increases. In today’s market, variable-rate mortgages are yesterday’s news.


Finally, a quick word from Mr. Majthenyi for people who are in the middle of variable-rate mortgages with those juicy discounts of days gone by: Enjoy.


“You should hug and love those mortgages to the last possible moment because you’re probably not going to get them again.”



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