25-year amortization or 30 years? Insured or Uninsured? With an A Lender or B Lender? These are just a few of the questions people have to decide on when they are pursuing a mortgage. But the biggest question of all: Fixed Rate or Variable Rate?

 

With the instability of the market, and the Bank of Canada’s continuous rate hikes, many people now are flocking towards a fixed rate mortgage over a variable rate. What this means is that they are choosing to essentially “lock in” at a rate for the term of their mortgage (5 years, 10 years, 1 year…you name it). Now there are benefits to this…but there are also disadvantages too.

 

For example, did you know that 60% of people will break their mortgage by 36 months into a 5 year term?  Whether it’s due to career changes, deciding to have kids, wanting to refinance, or another reason entirely, 60% of mortgage holders will break it.

 

And just like any other contract out there, if you break it, there is a penalty associated with it. However, there is a way to avoid paying more than is necessary. This applies directly to a fixed rate mortgage and we can help you decide what lenders you should go with.

 

If you have a FIXED RATE MORTGAGE:

There are two ways your penalty will be calculated.

 

Method #1. If you are funded by one of the Big 6 Banks (ex. Scotia, TD, etc.)  or some Credit Unions, your penalty will be based on the bank of Canada Posted Rate (Posted Rate Method) To give you an example:

 

With this method, the Bank of Canada 5 year posted rate is used to calculate the penalty. Under this method, let’s assume that they were given a 2% discount at their bank thus giving us these numbers:

 

Bank of Canada Posted Rate for 5-year term: 5.59%

Bank Discount given: 2% (estimated amount given*)

Contract Rate: 3.59% 

 

Exiting at the 2-year mark leaves 3 years left. For a 3-year term, the lenders posted rate.  3 year posted rate=3.69% less your discount of 2% gives you 1.44% From there, the interest rate differential is calculated.

 

Contract Rate: 3.59%

LESS 3-year term rate MINUS discount given: 1.69%

IRD Difference = 1.9%

MULTIPLE that by 3 years (term remaining)

5.07% of your mortgage balance remaining. = 5.7%

 

For that mortgage $300,000 mortgage, that gives a penalty of $17,100. YIKES! 

 

Now let’s look at the other method (one used by most monoline lenders)

 

Method #2:

This method uses the lender published rates, which are much more in tune with what you will see on lender websites (and are * generally * much more reasonable). Here is the breakdown using this method:

 

Rate when you initially signed: 3.24%

Published Rate: 3.34%

Time left on contract: 3 years

 

To calculate the IRD on the remaining term left in the mortgage, the broker would do as follows:

 

Rate when you initially signed: 3.24%

LESS Published Rate: 3.54%

=0.30% IRD

MULTIPLE that by 3 years (term remaining)

0.90% of your mortgage balance 

 

That would mean that you would have a penalty of $2,700 on a $300,000 mortgage

 

That’s a HUGE difference in numbers, just by choosing to go with a different lender! Knowing what you know about fixed rate mortgages now, let a Mortgage Broker help you make the RIGHT choice for your lender. We are here to help and guide you through the mortgage process from pre-approval onwards!