I get a call from an angry home owner at least once a week that is disgusted with the penalty their bank is trying to charge them. They always ask me, “there must be some way around this, isn’t there? What if I stay with them and give them my business, will they waive the penalty then?”
For the answer, you’ll have to watch the video blog below. Enjoy!
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Transcription of Video Blog:
Hi everyone, Rowan Smith at the Mortgage Centre. I want to answer one of the most common questions that we get, “Will the bank absorb some of my penalty if I give them my business?” The answer, absolutely not.
The bank has a legal right to that penalty in exchange for granting you a fixed rate for whatever length of time they gave you — whether it was a five-year, or a three-year, or a one-year — if you’re attempting to break that term, they can’t break the term on you and suddenly jack the rates if interest rates have gone up. They have to just absorb it.
On the opposite end of that pendulum, is the fact that you have to pay a penalty if you break the term. Now if you’re with a bank — and I’m just grabbing “hypotheticals” here. If you’re with Vancity, and you’ve been with them for three years; there’s two years left in your term, maybe you got in when mortgage rates were 5.7%, something like that.
At the time it was a great rate. Now looking back, it doesn’t look like such a great move. There is no way for you to have known that. Now that said, you made the best decision you could at the point in time.
You’re now getting an offer from Scotiabank to go over there at 3.89 for a five-year. Vancity is offering you 4.14, but they’re giving you a big penalty, somewhere to the tune of $20,000. And you’re thinking “This can’t be right. This has to be wrong.”
It probably isn’t if your rates have come down dramatically. Your penalties are calculated on the greater of three months interest or the interest rate differential at most institutions.
The interest rate differential is kind of a complex formula, but it basically looks at how much time is left in your mortgage, what rate would the bank be charging on money for the remainder of your term today, and looking at, therefore, how much they are losing and what they are going to charge you for it.
If rates have moved considerably, a percentage point or more, maybe not even quite that high in some cases and depending on the length of time left in your term, your penalty could be the equivalent of 10 months of interest. It could be very, very high.
If you are getting a quote of $15,000 or $30,000, you may want to double check with them. Don’t expect the next institution who’s coming along to try to pick up that penalty. They just won’t do it.
In the 10 years I’ve been in banking and finance, I have never seen one institution pay another’s penalty to bring the business over. I’ve never seen it. It just has never happened. I have seen institutions, when you stay with them, reduce the penalty, but I can count the number of times on one hand. And all of it has occurred with one financial institution.
So if you are thinking your penalty is exorbitant, it probably is, but we can still determine whether or not it’s a fair penalty. We can push back and make sure that their calculation that they are doing for the penalty is in line with what they are doing for their standard mortgage terms.
Now what does that mean? You’ve got to get those standard mortgage terms. You were given them when you signed the mortgage at the notary or lawyer’s office, if you are in BC. It should be a very thick booklet.
It could be 45 to 110 pages, depending on your institution. In there is a very detailed breakdown of how to calculate the interest rate differential. Now you are going to have to go to their website and pull up some of their rates. Find out what rate they are using and it’s not going to be very simple. I can help you with that.
If you want to know if you’re getting a fair shake with your penalties, what options you have, maybe I can get a bank to kick you some cash back as part of the deal to help offset some of those costs. Give me a call. From the Mortgage Centre, I’m Rowan Smith.
