Hi, everybody. It’s Rowan Smith with Citywide Mortgage Services. The question I’m here to answer today is how do you minimize your mortgage penalties?

    The short answer is…you have to pick your lender very carefully. Now, on a variable‑rate mortgage, uniformly across the board, it’s essentially a three‑month interest penalty. However, the fixed rates are where the real differences occur between the financial institutions.

    Now, to give you an example, I’m going to pick on the big banks here. The big banks have posted rates, right.

    Now, nobody really usually pays the posted rates, but the posted rates are there whether it be for qualification purposes or for subprime‑lending purposes or for penalty calculations.

    To give you an example, with some of our non‑banks, these are broker‑channel banks that you can’t just approach. You have to come through someone like myself. When you have a five‑year term ‑‑ let’s use the example of having three and a half on your interest rate.

    You have the same product at a bank, three and a half on a five‑year term. Now, you may feel more comfortable with that bank, you may be more familiar with them or what not, or have an existing relationship.

    However, when I tell you the difference between these two penalties, you’ll see why the broker‑channel lender is often the way to go. They’re sometimes referred to as monoline lenders, because all they do is mortgages.

    What they do is…let’s say after two years. Now, you started at three and a half percent, and after two years’ time, you decide I have to pay this mortgage. For whatever reason ‑‑ divorce, selling the home, being transferred on the job. Doesn’t matter.

    At that point in time, the chartered bank goes, you’re two years in, you have three years left. They go and look at their posted three‑year rate, which is like, 3.55.

    They go, the difference between 3.55 and your interest rate…they calculate it that way. They determine is it greater than three months’ interest, or is it the interest‑rate differential?

    Now, we don’t know where rates are going to be in two years’ time. It could be that the rates are far higher, so you don’t know if they’re going to be calculating that penalty off of a much higher posted rate. The difference between that posted rate and the rate you’re paying…if it’s greater than three months’ interest, you’ll pay that amount.

    With a broker‑channel lender or the monoline lenders, it’s the same calculation, except they don’t use the same posted rates as the banks. If two years in they look at their three‑year rate ‑‑ which is typically a three‑year discounted rate, maybe even lower than what you’re paying right now.

    If it is, it’s just three months’ interest. In these circumstances where you’re trying to minimize penalties, it’s important to do that up front. You’re not going to ever get banks to pick up penalties on the back end.

    They will not pay one another’s penalties. I get this question all the time, and it simply doesn’t occur. In my 14 years in this business, I have never seen a bank pick up another bank’s penalty. If you’re watching this video in the middle of your term, hoping to find a way to minimize it, unfortunately there is no easy solution and no easy way out.

    For Citywide Mortgage Services, I’m Rowan Smith.

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