What will it cost to pay off your mortgage quicker or switch?
You have more flexibility with a better mortgage product. These are just a few options and costs you can expect from your mortgage.
Change is the best spice in life. Does your mortgage agree?
Different terms can be offered with every mortgage product. But — life happens (an unapologetically-true cliche). Sometimes your circumstances may change suddenly. In such cases, you should review your fine mortgage print to find out what you can do.
For example, you may want to:
- Modify your payment frequency
- You can increase your payments or skip one.
- Pay a lump sum to your principal
- You can make more considerable changes to your mortgages, such as a rate type or a refinance.
- You can pay off your mortgage ultimately (early)
We believe it’s essential to have choices. This is why we support your better loan. Lenders also want to protect their income source, which is your mortgage loan and the interest you pay. It is understandable that some modifications will have a price.
Let’s look at any penalties or pre-payment options that might be included in your terms.
What type of mortgage product do you have?
Lenders offer a variety of mortgage products that are often linked to rates and have different levels of payment flexibility.
OPEN TERM MORTGAGES allow you almost unlimited flexibility when changing your payments, paying your mortgage, or switching. However, it usually comes with a higher variable rate.
CLOSED TERM MORTGAGES mean you are locked into your rate and term for a specific time (most common is five years). This mortgage offers lower rates but more restrictions. Most Canadian homeowners prefer this type of mortgage.
- Variable-rate mortgages have fewer pre-payment penalties but carry more risk if rates rise.
- Fixed-rate mortgages carry more penalties but are less risky because your rate is locked in.
- Many lender products offer the option to increase your payments or receive lump sums each year with a closed mortgage (fixed).
What prepayment privileges should you have?
- Increase your monthly mortgage payments. This means that you can double your monthly income. Lenders may allow double-up payments only a few times a year.
- Lump sum prepayment. Lenders may allow you to make larger payments on your mortgage every year. This is usually a percentage (can range from 5 to 20%; vary by lender).
- Payment schedule flexibility. There may be an option to switch from a monthly schedule to a bi-weekly or accelerated program bi-weekly. This will increase the principal amount before interest charges. Some lenders don’t charge for this, while others do.
For prepayment options, check with your lender. Mortgage Broker Burnaby can also check your prepayment options at no cost and without obligation. We can provide payment modeling for various scenarios so you can compare the numbers to your mortgage goals.
What pre-payment penalties would you have to pay?
Suppose you want to end your current term and pay a higher amount down or ultimately pay it off. In that case, you could be subject to costly penalties and administrative fees (such as tax, legal, appraisal, title, tax, and discharge fees). A better mortgage product won’t charge you more than the standard penalty.
- A penalty for early payment may be applied if you pay the entire mortgage off at once, mainly if it is before the end of your term. It is usually a percentage of the unpaid principal balance.
- Three months of interest are typically charged to exit a variable-rate mortgage.
- Fixed-rate mortgages are eligible for the Interest rate differential (IRD). Lenders will charge the IRD or three months’ interest, whichever is higher. The IRD is the difference between your original mortgage interest rate and the current interest rate applied to the remaining mortgage term. Lenders can calculate IRD; differently; some may be much higher than others.
If you are with very restrictive terms, any change you make can result in a significant increase in your monthly payment, a higher mortgage payment, or the sale of your home. Open-term mortgages offer the most incredible flexibility and have no penalties for repayment, but there may be some administrative fees.
Beware of the extra costs of an ‘ultra-low’ rate product.
If you anticipate needing to make changes, mortgages tied to bargain-bin rates can be more expensive. They may trap and bind you with a bona fide sale clause. This is a restrictive condition that can prevent you from selling your home. It can also make it more difficult to change or charge hidden fees.
This is how you calculate your IRD penalty. Talk to us to get the numbers magic!
- Step 1 Look at your most recent mortgage statement. Take note of the interest rate, the remaining time on your mortgage, and the balance. If you have made two payments on an amortized 5-year mortgage, there will still be three years (36 monthly payments) on your mortgage.
- Step 2 Add 1.5% to your current rate. This is the posted rate at the time that your mortgage was issued. Find today’s posted mortgage rate for a comparable mortgage offered by your lender. For our example, use the posted rate closest to your remaining term (e.g., three years). The 3-month interest penalty applies if the posted rate exceeds your mortgage rate and 1.5%.
- Step 3 Add 1.5% to your current rate and subtract the posted rate of your bank. This will give you the interest rate differential (IRD).
- Step 4 Multiply IRD by the remaining mortgage term (in our case, three years). Add that number to the principal balance on your mortgage. Your IRD penalty will result.
Please be aware that many lenders do the IRD calculations in this manner, but not all. To find out your exact IRD penalty, contact your lender. Or we can help you to put your penalty in perspective.
There are many things that can happen over a mortgage term.
We can help you find the best options for your needs.
A Mortgage Specialist friendly and knowledgeable broker can quickly assist you in understanding the details. They will even recommend a better mortgage fit through a renewal time or a refinance.
Are you buying your first home? To save you some cash, Mortgage Broker Burnaby get you a flexible mortgage from the beginning.