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28 March 2012

2.99 is about to go

BMO and RBC are cancelling their 2.99% effective Tonight, I still have lenders who are hanging in but we don’t know for how long.  5 year fixed going to 3.49%, an increase of a half percent.  

http://business.financialpost.com/2012/03/26/rbc-axes-2-99-discount-mortgage/

http://www.ottawacitizen.com/business/fp/rate+bank+mortgages+draws/6363424/story.html

 

You could end up Paying 4.60% or higher for your 2.99% Mortgage with some lenders

You would think in this day and age, an apple would be an apple and a mortgage would be a mortgage.

Most people focus so closely on mortgage rates that they forget to read the fine print.  It is this fine print that is often costing people $1000’s at the worst possible time.

Let’s face it when you are signing your mortgage papers for that new house you just bought, you are not really reading all the other papers too carefully. 

Most lenders try to make themselves sound the same which is why this is so confusing. 

Anyone taking a fixed mortgage will be told that there is a penalty to pay to get out of that mortgage early.

“Everyone pays the greater of 3 months interest or Interest Rate Differential (IRD)”.  Sounds simple enough.

3 months interest penalty is real simple to calculate, and is universal with all lenders..

Mortgage Balance X Rate / 12 X 3 months.  

You would think IRD is universal from lender to Lender too.  This is not the case.  There are vast differences in this calculation that significantly inflate the cost to break your mortgage. 

There seem to basically be 3 separate categories in the calculations of the rate to determine the Differential.

The Worst… The Highest IRD’s  Lender #1

These Lenders will compare your current mortgage rate with the equivalent GIC/Bond rate for the term remaining.  Some lenders who approve higher risk style deals use this style of Differential, I have seen mortgage penalties as high as $23,000 on a $185,000 mortgage.  The clients are often paying higher rates to begin with because they don’t qualify for traditional mortgages , and then the lender is using the lowest possible rate to increase the difference, and charge a significantly higher penalty.  

Next… (And the Big 5 Banks fall into this.) Lender #2

These lenders are using your “Discount” to establish the rate for the Differential.  For those taking the 2.99% 5 year fixed, the 5 year posted rate at the big 5 banks is 5.24%, so your discount is set at 2.25%.  This number becomes what determines your penalty.  Let’s speed up time and assume it is now 3 years later and all the rates are still the same, so you have 2 years left.  The current 2 year posted rate is 3.55% - your 2.25% discount means your rate to calculate the differential is 1.30%.  So take a $185,000 mortgage X (2.99-(3.55 -2.25) = 1.69%) /12 X 24 the# months left in your contract.   =  $6252.99

 

Last,  Lender #3

Lenders who do not actually have “POSTED” rates will compare your mortgage rate with their mortgage rate for the time remaining in your mortgage.  So same scenario, with the $185,000 mortgage at 2.99% with 2 years left.   The posted 2 year rate with one of these lenders is 3.15%  (this was how the 5 Big bank’s previously calculated their penalties)

$185,000 X (2.99 – 3.15= -.16%) (Because this is negative, then the 3 month interest penalty would apply. )

So $185,000 X .0299/ 12 X 3 months = $1382.87

Lender #1’s penalty is $23,000  Not a fair comparison but important to understand about these types of lenders.

Lender #2’s penalty is $6252.99 (5 major Banks version)

Lender#3’s penalty is $1382.87 

And yet all 3 lenders advertise, ”You pay the greater of 3 months interest or IRD.”

I understand it is difficult to forecast a reason as to why you might need to sell your home before maturity, and yes you can “PORT” your existing mortgage and avoid a penalty, but if for some reason you need to sell and no new house is being purchased, then your understanding of the different “Differential” policies and how they might affect you is crucial.

Something to ponder….

Paying 2.99% with a $6252.99 penalty after 3 years is the same as paying 4.60% without a penalty.  The penalty figure could be higher if you were trying to break your mortgage sooner.

So the only way you will actually get the 2.99% effective rate is if you go the full 5 years term.  This is kind of like the 0.00% interest for 12 months at Home depot as long as you pay it in full after 12 months.

So be careful of the big 5 Bank’s IRD calculations sometimes things are not as good as they seem.

http://www.mortgagebrokernews.ca/tv/the-big-story-prepayment-clarity/123579

This link shows how other brokers agree that the penalty calculations are vague at best.   

Call me if you need a rate held.    

 Thanks,
 
David Kendall

 
Mortgage Agent

License # M08004045

 
211 York Road, Unit 3, Dundas, Ont. L9H 1M9

OAC Mortgages Brokerage License # 10928

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