Housing Recovery? We May Have To Wait…
The Ghost of the Posted Mortgage Rate Past
A study from the Bank of Canada concluded that those consumers who receive the best mortgage rate are those who are willing to bargain and negotiate, have more equity, are new clients, and who use a mortgage broker, among other variables. As follows, it is rare nowadays that anybody should pay the bank’s posted rate on mortgages anymore. While this is both reassuring and liberating to the consumer that with assertion they can derive more efficacy from their contract, this benefit can shroud a possible enduring snag of the posted mortgage rate.
In the event that you do break your mortgage, it is the posted mortgage rate that is used to calculate the penalty. In theory, the mortgage penalty is meant to compensate the lender for the interest payments they lose when you break a mortgage contract early. Except in most cases, the lender exaggerates this compensation, in effect profiting themselves and punishing your actions. Lenders do this by calculating the punitive fee based on the posted mortgage rate instead of the discounted rate you actually haggled and signed for.
Now, periodically forget that banks are skimming off profit from your penalty, and propose that the penalty fee exists also as a disincentive to break that contract. Of course, going into the contract you’ve likely already prepared yourself to commit. After all, buying a new house is no rash decision, so it’s difficult to imagine as you’re excited to move into your new place, that you may not be as committed as you think.
You may not foresee yourself having to break your mortgage.
McLister says 70% of people adjust their 5 year fixed rate mortgage before maturity – even if it was simply to refinance or upsize to a larger home rather than break the mortgage outwardly. In the case of a variable-rate mortgage, you can presume to be charged 3 months’ interest; With fixed-rate mortgages however, the penalty will be the more expensive of either 3 months’ interest, or a calculation called the IRD (Interest Rate Differential).
Therefore, with the fixed-rate mortgages – although it will be hard to fathom breaking your mortgage at that time – it is essential that you ask whether the lender uses the discounted or posted rates to calculate the penalty. Herein lies the penalty difference of thousands of dollars. As one can imagine, the lender using the higher, posted rates, will equate to a much higher penalty fee, and profit for them.
Again, the lender with their exaggerated penalty fee also aims at the ulterior motive of trapping your business with them so you cannot move to another lender. Come time if you should want to refinance your mortgage or upgrade your home, this penalty can be used against you and the supposed competitive rate they offer you will seem appealing compared to the fee you could face if you choose another lender.
Consumers have an affinity for convenience that often out-rationalizes cost. To stay out of the penalty box, your best bet is to choose to have your mortgage with alternative financial institutions rather than your big bank. Let me help you off on the right foot by neogotiating the best rate for you, and helping navigate your contract when considering refinancing or breaking your mortgage.
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