Writing for MoneySense, industry observer Romana King said that brokers are uniquely placed to enlighten consumers on how penalty is calculated (i.e., the larger value between three months’ interest and the Interest Rate Differential), as well as to assist borrowers in getting the best results.
Discounted rates are treated differently compared to variable rate mortgages, where penalties are three calendar months’ worth of interest.
“Apparently, some lenders will include the money you saved by going with a discounted rate and add it back into the formula when calculating the penalty. So, if you may have negotiated a five-year fixed-rate mortgage at 2.99%, but the penalty for breaking that mortgage may actually be based on the posted rate, which currently sits at 4.64%,” King explained. “It’s the equivalent of having to pay back your discount because you broke your contract.”
For brokers with clients who are considering breaking their mortgages, it’s best to double- and triple-check the math involved and look around to get the best possible deals.
“Call your lender and ask them to calculate the penalty to break the mortgage today (most can’t do future projections, but you can get a good ballpark if you ask them to calculate the penalty as if you were breaking the mortgage contract today),” King wrote.
“Whether you opt for variable or fixed, consider shopping around. When comparison shopping don’t just focus on rate, but consider how penalties are calculated and if you have prepayment benefits,” she added.
Mortgage borrowers who are unable to fulfill their payments in their declared periods say, two or five years) are slapped with a penalty to ensure that the lender makes up for the lost revenue—a situation where the specific skill set of brokers would be able to help out, according to an analyst.