Mitigation starts before choosing a mortgage

nolanLast week, CBC’s Go Public reported on an Edmonton couple that were shocked to learn their bank wanted a $17,000 payout penalty to end their mortgage early.

Just days earlier, a B.C. mortgage broker posted a client’s $26,000 payout statement from another bank on Facebook that went viral.

And in July, a B.C. Supreme Court judge certified a class-action lawsuit against yet another financial institution for unfair payout penalty practices.

The common thread in all three of these cases of payout-penalty craziness is they could have been prevented with a bit of foresight and some sound advice.

There are two primary factors to avoiding payout penalty shock: the lender and type of mortgage.
First, the lenders with the most reasonable payout penalties are often wholesale operators who are funded by their big-bank counterparts, but may not have name-brand recognition in Canadian households. These lenders include companies such as First National, Merix Financial, Street Capital and CFF Bank.

Second, choosing the right type of mortgage can make a significant difference when it comes time to paying it out.

For example, a variable-rate mortgage will almost always have a smaller payout penalty than a fixed rate – usually three months interest. Similarly, shorter-term mortgages will also typically have lower payout penalties.

There are exceptions to this rule, however. For example, federal law requires mortgage terms amortized longer than five years automatically revert to a three-month interest penalty at the five-year mark.

This means seven- or 10-year mortgages will only be subject to interest rate differential calculations for the first five years. After that, borrowers are pretty much free of having to worry about excess payout penalties.
Regardless of the lender or type of mortgage, the only surefire way to prevent excessive payout penalties is to do your homework before you sign on the dotted line.

Start by talking to your bank. Then talk to an Accredited Mortgage Professional. Start the conversation by discussing payout penalties. Then eliminate the lenders who are excessive in their calculations, and select the best rate from there.

Selecting a lender this way will take the emphasis off the interest rate and put it on what really matters: how much money your mortgage will actually cost you.

Nolan Matthias holds a bachelor of arts in Economics, is the co-founder of Mortgage360 and the author of The Mortgaged Millionaire. Call Nolan at 403-615-6132 with your questions or to set up an appointment with an Accredited Mortgage Professional (AMP).