Most mortgages have a fee to exit the contract, but calculating it can be confusing and expensive. You have to pay the greater of 3 months interest or the IRD, Interest Rate Differential. The reason for the penalty is to compensate the lender for the loss of expected profit. If a borrower promises to borrow money for five years, the bank counts on five years of interest payments. Reneg on that deal, and the lender needs to recoup some of that loss revenue. The issue is how this penalty is calculated and, for the most part, each lender has a slightly different variation. This is one of the top 3 complaints to the banking Ombudsman. In fact in 2011 there was a class action suit against CIBC in B.C. and Ontario.
If you are in a variable rate mortgage, the penalty is most often 3 months worth of interest, but the IRD is more difficult to calculate. In it's most simplistic form, this is how it looks:
(posted rate at original mortgage date - posted rate for remaining term) / 12 = IRD Factor * outstanding mortgage balance * number of months remaining in term + lender discharge and mickey mouse fees.
Most big bank websites offer their own online calculator, but for the most accurate answer, consider calling your mortgage adviser and ask for the exact amount as if you were to break your mortgage today.
Here is a true story, a lesson in fact, in the importance of working with a mortgage specialist to get an accurate picture of your present financial situation. It's not enough to sit down with your standard bank representative, and chat for 5 minutes about the key details of your income and expenses.
You need someone who asks all the pertinent questions, because this sort of investigative work is in your best interest. It can help protect you from the burden of taking on a loan that would stretch you to your last penny, and leave you unprotected should some unforeseen events arise. It can also prevent the awful situation of falling in love with a home; negotiating the price to something you are comfortable and happy with, only to find that you are unable to secure the necessary financing to complete the purchase.
These mistakes are completely avoidable and can lead to a more enjoyable experience, especially for first time home buyers.
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Buying and Selling Residential, Condominium and Investment real estate in the Waterloo Region since 2008. Oh, and also Ottawa! :-D