Long term is almost always more expensive.

Ever wanted to change cell phone providers?  How about internet providers?  Move your investments or rrsps?  Cancel that hydro or gas contract because you moved?

And how about mortgages?  When interest rates started heading down about 4 years ago, thousand of borrowers in fixed rate mortgages wanted to get out of their higher rates and start benefiting from the record low interest rates.

But borrowers were shocked to hear of unbelievably high early prepayment penalties…   Penalties of $15,000, $20,000, $30,000.    One recent situation had CIBC charging a $33,000 penalty on a $500,000 mortgage.  I’ve seen dozens and dozens of situations like this.   Almost all of these high penalties were from one of the BIG SIX BANKS…   

Here’s a NEWS FLASH!!! Their prepayment penalty calculations are inflated and result in much higher penalties than several other Lenders… and here’s another surprise…you’re more likely to get a better rate elsewhere, too!   click here to understand exactly how penalties are calculated.

2 years ago, the pattern repeated itself.   5 year fixed rates started dropping to new all-time lows (under 3.00%), and Variable rate pricing increased (unexpectedly and almost like there was some collusion among Bankers) to a point where 5 yr fixed and Variable were almost identical.   This is the only time that I could find where 5 year fixed was actually a better option over Variable or short term products.

Don’t get lulled by the BIG SIX BANKS or sucked in by their glitzy commercials or highly visible branch network.   This doesn’t make their mortgages better…  And better options do exist.  Better options are available.    Speak with a reputable mortgage broker to help you shop.   Better products do exist and are available… you just need to look and get some advice.

The message is clear.   Beware of long term mortgages... with the average person moving or refinancing about every 3 years (according to the stats), choosing a 5 year fixed rate term is usually not the best option.  It could cost you more than you think.

(Just a personal note… The BIG SIX BANKS have come out of the recession stronger than ever..   reporting record profits… The top 4 most profitable corporations in Canada are BIG SIX BANKS reporting a combined $24 billion profit.  It sure would have been nice to see some mortgage relief given to the average homeowner.   CMHC used to cap their penalties to 3 months interest but removed this cap in the late ’90’s…. All financial institutions were free to keep the 3 months penalty cap or charge a higher penalty based on new Interest Rate Differential calculations... You can guess which path the BANKS chose.  But several other Lenders didn’t increase their penalties…)

End result is, the longer the mortgage term, the greater the penalty.    Still like long term contracts?

Your best interest is my only interest.

As always, I welcome your comments, calls and questions.

Steve Garganis 416 224 0114 steve@mortgagenow.ca