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Canada's Mortgage Experts
June Newsletter 2019Posted on: 2019-05-31
Why early payout penalties matter now more than ever.
We are deep in the competitive spring real estate market! And we’re seeing a very interesting rate anomaly. Fixed-rate mortgages are very competitively priced and gaining in popularity, while variable-rate mortgages are looking overpriced. We’re even seeing ten-year mortgages at good rates back in the news. If the market is telling us that fixed-rate mortgages have an advantage, then be sure to look at the fine print because the devil is in the details and early payout penalties matter.
Why? Sometimes you just need to get out of your mortgage! It’s impossible to plan for many of the things that will happen in our lives, like job loss, illness, divorce, relocation, or another personal matter. Or when much better mortgage rates become available. Your needs and the market can shift easily during the term of your mortgage and the last thing you want is a painful penalty to get out early. That’s why it’s important to consider what your early payout penalty may be before you get your mortgage. We all want to believe that none of these scenarios will transpire, but when they do, it’s a relief to have a cost-effective option to get out.
Generally, to break your mortgage, you can expect to pay the greater of either a) three months’ interest, or b) the interest-rate differential (IRD). With the IRD, your mortgage lender will want you to pay the equivalent of what they will lose by releasing you from your mortgage and lending the money at current rates. Not all lenders calculate IRD the same way, and the differences can amount to thousands or even tens of thousands of dollars.
Early payout penalties are particularly important to consider if you are looking at a 10-year mortgage. If you break a 10-year mortgage before 5 years, the penalty with most lenders can be substantial. If there is a chance you could break the mortgage in the first 5 years, you may not want to consider a 10-year term.
Don’t let anyone tell you early payout penalties are “all the same”. They’re not. When choosing between mortgages, be sure to compare how the early payout penalty will be calculated. If you ever need to get out of your mortgage early, having the right mortgage could save you stress and big money. Advice on how to avoid painful penalties is part of the service I provide to my clients every single day!
Good Debt vs Bad Debt
Good debt is manageable debt that can bring you close to your financial goals. It includes a well-structured mortgage, or borrowing to invest when it is designed to improve your overall financial position. Bad debt gets in the way of building long-term wealth, and creates an ongoing burden that ranges from uncomfortable to crippling. It includes credit cards, high-interest loans, and “buy now/pay later” purchases. If you’re borrowing a large amount for any reason, including organizing your current debt, please let me know. You may be able to look to your mortgage for your lowest cost funds.