So why doesn’t everyone get a mortgage with a fair penalty lender?
Many people are conditioned to pay more for big bank financing. Among other things, they trust the brand, like the convenience, or like knowing they can walk into a branch to talk to someone if there’s ever a problem (although, for most people, mortgage problems after closing aren’t too common). Unfortunately, the cost of that convenience is steep.
A Simple Example
Suppose you are a major bank customer with a $300,000 mortgage at a rate of 2.69% (originally a 5 year fixed term mortgage) taken out 38 months ago.
Now imagine you:
- Need to consolidate debt into your mortgage
- Just found a new job in a different city and must sell and rent
- Want to break and renegotiate to a lower rate
- Have to break the loan early for some other reason – maybe because of a loss of income, divorce, inability to get a fair rate from your bank on a “port and increase” (that’s where you move your mortgage to a new property and increase the loan size), or inability to qualify for a port.
In these scenarios, one popular bank would charge you an interest rate differential (IRD) penalty of roughly $10,409.18 to exit your existing mortgage.
Compare that with a “fair penalty lender” with an interest rate differential (IRD) penalty of $2500.00.
That is an astronomical difference!
Many determined mortgage shoppers focus simply on rate and will do anything to save even a 10th of a percentage point off their rate however, most mortgage borrowers are not aware of the hidden costs associated with their mortgage until after they have broken their mortgage.
The time has come to heed this lesson as borrowers. Big-bank IRD penalties clearly overcompensate banks for the legitimate expenses they incur when a customer backs out of a mortgage early. The more that people demand fair penalties, the more pressure it will put on Canada’s six biggest lenders to change their methods.