Your Canada Mortgage Payout Penalty – nothing quite like getting kicked twice by a horse

With your Canadian mortgage payout penalty that is charged for early repayment, there are some standards that are generally accepted by most lenders.  However there is a dirty trick implemented by some of the big banks when calculating your interest rate differential (IRD) penalty.

First a quick summary of your Canadian Mortgage Payout Penalty

3 months of interest: Almost always used for variable rate mortgages, sometimes used for fixed rate mortgages when it is greater than the IRD.

IRD: Used for fixed rates to determine the amount of money the lender is losing due to your early repayment versus what they can currently re-lend your mortgage money and remaining term for.

And now for the morally questionable Canadian mortgage payout penalty calculation:

Traditionally this is what an IRD calculation would look like:

Assuming a current $200 000  five year fixed mortgage at 5.0% with two years remaining on the term and a current discounted two year rate of 3.4%: IRD penalty is $6400.

The fine print that many big banks place in their Canadian mortgage payout penalty calculation:

When determining the comparison rate (in the above example 3.4%) the original discount received on the initial mortgage is to be subtracted from the current posted rate.  In plain english, when we do a mortgage there is often a discount off of the posted rate depending upon the term length, for example the discount from the 5.39% five year posted rate to the 3.89% current rate is 1.5%, however the current discount on a two year term is 3.85% posted to 3.4% discounted with a discount of only .45%.

When the big banks calculate the penalty, they use the original discount that you received on your five year term – NOT the market discount for your remaining term. When we use this some what dishonest and unrealistic calculation, in the above example your comparison rate decreases from 3.4% to 2.35% (3.85% posted – 1.5% original discount).  When we translate this to the previous example this results in a pay out penalty of $10 600, a INCREASE of $4200 or 65%!

Bottom line, this is dirty pool and is a commonly accepted lending practice in Canada.

Who are the typical offenders? You guessed it – TD, RBC, Scotia, BMO.

How do we avoid it? by ensuring your mortgage professional works with one of the many large Canadian trust companies that only use the discounted rate for pay out penalty calculations and offer you a true and fair number.  Please feel free to contact me regarding your Canadian mortgage payout penalty or any other questions.