Interest rates are at records lows.. it’s popular water-cooler talk… You’ve heard your co-workers or friends who are lucky enough to renew their mortgage into these emergency, once in a lifetime rates..
But how you do you take advantage? If you break your fixed rate mortgage then you face an enormous prepayment penalty…we’ve seen reports of $10k, $15k and $20k in penalties….Wow!
Well, here’s a few tips…
-first, if you are in a 10 year fixed rate mortgage, and your are at least 5 years into the term, then the maximum penalty is 3 months interest (this is a little known fact… Section 10 of the Interest Act of Canada).
-One more way to reduce the penalty is to utilize the annual prepayment privilege that’s within the mortgage. Most mortgages have between 15% and 25% prepayment privileges which equates to a 15% to 25% reduction in the penalty….
-negotiate the penalty in combination with an extension on your current term..this requires some discussion with your current lender and you should seek the help of a mortgage broker…if the lender wants your business they may be able to offer some incentive to stay.
Another situation where the lender cannot charge any penalty is if the mortgage goes into default and the lender issues a Notice of Sale (legal action to collect the mortgage)…. of course, I”m not suggesting that anyone default on their mortgage.
Our best piece of advice is this… don’t take the lender’s penalty calculation at face value… penalty calculations have changed and most bankers couldn’t tell you how the penalty is calculated if you asked them. Always review the penalty with an unbiased party… speak with your mortgage broker or lawyer…enjoy the weekend!