Musical mortgages

Stop! Before you transfer your mortgage…..

Too switch or not to switch, that is the half-a-million-dollar question. 

Mortgage lenders that is.

Many buyers purchasing homes already have a mortgage with their existing financial institution or another lender. 

Most assume that in order to save the penalty, they should stay with the existing lender. 

Is this a wise decision?

There are two questions you need to ask yourself.

• Are you adding more mortgage money to your existing mortgage balance? 
• And how long are you going to stay in this new home?

If you are adding money to your mortgage, some lenders will blend the new money at the posted interest rate, which is sometimes as much as 2% over the current discounted rate. 

It may make sense to take a look at the difference in cost  over the remaining term of paying the penalty and getting a new discounted rate on the entire mortgage. Also sometimes a discounted five-year rate is preferable as it may allow you to qualify for a larger mortgage.

If you are thinking that you may not stay in the home for the full five-year term, then, you will definitely not want to blend and increase your mortgage because this will leave you with a higher rate mortgage now over  a longer term and you may face a large penalty again when you go to pay it out. 

Most borrowers need to blend the mortgage out for five years for ease of qualification. The government requires that short term mortgages (less than five years or variable) be qualified at the posted five-year rate of 4.64%.

Speaking of penalties, have you ever wondered how those penalties are calculated? 

Most major financial institutions (banks and credit unions) take your existing mortgage mortgage rate, add on the discount they gave you when you took out the mortgage to determine the base rate.

They then find the posted rate that they are currently offering that matches your remaining term and calculate the difference in these two rates for the balance of the term remaining.  This is to reimburse them for the loss of a higher rate mortgage. 

If your mortgage is lower than the current rate then the penalty is three months of interest at the posted rate, not your contract rate.

I went to the various websites below and calculated the penalty on my own mortgage that I had.  Here are the results of my calculations:  (These results are subject to change based on the date and balance of the mortgage and the current mortgage rates).  The mortgage was $281, 901.65 with a 2.70% discounted rate, $132.0.54 monthly payments and a maturity date of November 1, 2018, held at the CIBC.

• Royal Bank $7628.33 — RBC prepayment calculator
• TD  $9208.79 — TD Canada Trust prepayment calculator
• CIBC: &9887.97 — CIBC & Firstline prepayment calculator
• Valley First CU – No calculator online
• MCAP $2793.18 — MCAP prepayment Calculator
• First National  $2912. 69 — First National prepayment calculator

As you can see there is huge discrepancy in the penalty from a high of $9887.97 to a low of $2793.18.  This is the reason I challenge to question porting your existing mortgage and take a look at some of the other options available to you especially with the monoline lenders who generally work through mortgage brokers. 

Mortgage rates are only one aspect of a mortgage.  The prepayment options available and the penalty calculations can cost or save you thousands of dollars.

If you need help deciding whether to port your mortgage or how to calculate your penalty please call me at 250 862 1806 or email.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.