 Mortgage
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Calculating
Your Mortgage Penalty
Today's market is bringing a lot of
questions about whether you should consider refinancing your mortgage for
a better rate. There are many different reasons people might re-negotiate
their current mortgage. You may be considering using some of the equity
in your home you have built up and use it to buy a rental property,
pay off some high interest rate debt or just renegotiate your current rate
for a better more competitive rate and lower monthly payment.
Below are some ways in which you can
get a good idea on what kind of penalty you may be faced should you want
to refinance your current mortgage. Again these are used simply as
a guideline and are in no way exact. The lending institution you
are currently dealing with will give you the exact amounts relating to
your specifac situation. You can also use this handy Mortgage
Penalty Calculator.
Calculating
Payout Penalties & Interest Rate Differentials (IRD)
Many closed mortgages include a clause
stating that the payout privilege on the mortgage will be a three-month
interest penalty, or interest differential, whichever is greater.
For the calculations below, using
the following scenario:
-
$300,000 remaining on the mortgage
-
3 years into a 5-year fixed term at 5.5%
-
Today’s interest rate: 3.5%
We’ll just be using the simple interest
amount – the actual amount of the penalty could be a little less than the
amount quoted in the examples.
Three Month
Interest Penalty :
Mortgage Balance X
Interest Rate X 3 months
Plugging in the variables above, we
would get:
= $300,000 X
0.055 X 0.25
(5.5% = 0.055, 3/12 = 0.25)
= $4125.00 would be the 3 month interest
penalty
Now we have to calculate the interest
differential – and that’s where penalties can be quite substantial – especially
since interest rates have dropped considerably lately.
Interest
Differential Penalty:
Current Mortgage Balance X
Interest Rate Differencial X Time
remaining
=$300,000 X
0.02
X 2
(0.02 = 2% which is the difference
from 5.5%-3.5%, and 2 years left in term)
=$12,000.00 would be the Interest
Differential Penalty
In the example above, the bank would
then use the Interest Differential Penalty since that amount is the greater
of the two. Please speak to your mortgage broker for your personalized
mortgage advice, as payout penalties are dependant on the contract you
signed and remember are subject to change.
Blend-and-extend
option
Heres another option that you could
consider, some institutions also allow you to extend the length of your
mortgage prior to your mortgage renewal date, to take advantage of the
current low rates by creating a new blended rate and longer-term mortgage.
This is called the “blend-and-extend” early renewal option. Not all financial
institutions offer this option, and different institutions have different
ways of calculating this option.
Just remember this option allows you
to stay away from paying a penalty “up front” to get a better rate, it
doesn’t mean you aren’t paying for one, its been built into the new rate
calculation. The Lender calculates somewhere between your current rate
and today’s rates, thus recovering any loss for breaking your current contract
and taking advantage of a better rate. It's not always the
best option, but thats what it is an” option” for you to consider.
Again contact me directly, I can certainly
weigh the different options with you and find the best solution for you.
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