When shopping around for a house or looking to re-finance the first thing most people look for are rates. It is after all the least confusing part of a mortgage to understand and it does after all dictate how much money you will be paying in interest. It is also conveniently easy to advertise! Looking only at rate is where most make their first mistake.
Did you know that the average mortgage is broken in 3.8 years? The most common reasons are re-financing (to consolidate debt), switching (for a lower rate), porting (to buy a new house) or paying out (divorce, etc.). With that in mind, doesn't it make sense to know what it will cost you to break your mortgage?
Read on for the top 5 points you should ask about mortgage pre-payment penalties:
- Know your mortgage penalties before you sign the papers. You may be thinking that there is no way you will need to break your mortgage but with statistics showing 60% of mortgages are broken within 38 months of the term*.
- Can you port your mortgage? What happens if you get married, have children or need to relocate for work? You should know what happens, and if you can transfer your mortgage to the new property you purchase.
- What kind of mortgage charge is it? Standard or Collateral - if it is the latter you will have to pay to discharge your mortgage ($500-$1000) if you decide to switch lenders and the penalties to break are often extreme.
- Do you know your pre-payment privileges? Can you increase your payment? Or what about if you want to discharge your mortgage and decrease your penalty, how much can you pay it down by? These questions are very important to ask, especially when considering an aggressive mortgage payment strategy, basically if you want to me mortgage free sooner you should be know the answers to these questions.
- When it comes to your IRD (Interest Rate Differential) Penalty, how is it calculated? Does your lender calculate it using the posted rate, discount rate or best rate? This is definitely one part which should not be skipped. On a current $250,000 mortgage with two years remaining it could mean the difference of $8,000!
If you are looking for a mortgage, all things being equal like rate and privileges, be sure to take the prepayment penalty into consideration. We as mortgage advisors are experts at providing the advice, education and resources that home-buyers and owners need. As your dedicated advisor I will walk you through any and all pre-payment penalties before you choose a lender or sign a commitment.
Alternatively if you are in an existing mortgage term we have plenty of different options for saving you money if you are going planning to break your term early. Don't accept the banks higher offers, make sure to give us a call if you have any questions.
*Source - CAAMP Survey