The most accurate way to calculate a mortgage payout penalty.
Click on your bank to calculate the penalty to break your mortgage early.
What happens when I break my current Fixed Rate Mortgage contract?
The current conditions of your mortgage contract may no longer meet your needs. If you want to make changes before the end of your term, you can renegotiate your mortgage contract. This is also known as breaking your mortgage contract.
You may want to pay a mortgage penalty and break your mortgage if:
interest rates have gone down
your financial situation has changed
you want to buy a new home and are planning on moving
your family situation has changed
your home no longer meets your needs
Get advice you can depend on.
One of our Mortgage Brokers will be happy to review your current terms and properly advise you if it is wise PORT your current mortgage, or start fresh with a new product. Reach out today!
Interest Rate Differential (Mortgage IRD). What is it?
The interest rate differential is calculation method lenders will use to break your mortgage early if needed. Simply put, depending on how far you are in the term of your product, they will equate the “Interest Rate Difference” using the remaining balance on the term compared to current rates and the balance of interest owing. Be careful! Lenders are very crafty in their calculation methods and rarely disclose properly upfront how much it will cost you to break your mortgage. Many “low rate” products have the worst IRD calculation, costing you thousands! It is important to consult our Mortgage Broker’s to provide you the BEST lender with the BEST IRD formula possible for Fixed rate Mortgages.
Watch this video for a basic understanding.
What happens when a Fixed rate mortgage is paid out before the term ends?
When a Borrower pays out their mortgage during the term, the Lender no longer receives interest on the mortgage, however the expenses related to the mortgage (the “Lender’s Cost”) still exist. If the interest rate available to re-lend funds for the remaining term of the mortgage is less than the Mortgage Interest Rate, there may be an IRD penalty due.
Prepayment penalties occur when a borrower pays more towards principal than what is allowed under the prepayment privileges of their mortgage contract.
If a borrower pays down their mortgage beyond the prepayment privilege, the lender is owed compensation (penalty) by the borrower. In some circumstances that compensation is an Interest Rate Differential (IRD).
IRD is a formula typically composed of three components
1. The difference between two interest rates (“Re-Lending Rate Variance”); typically, the Mortgage Interest Rate and the interest rate that is available for the remaining term, and:
2. The balance that is subject to the penalty, and:
3. The time to maturity
A simplified expression of the IRD is:
IRD = Principal Amount (A) x Re-Lending Rate Variance (B) x Time to maturity (C)
Since the principal amount (A) is paid down over time and the time to maturity (C) is also reducing as time passes during the term, these two elements have a reducing impact on the IRD.
When the IRD increases from one day to the next it is because the “Re-Lending Rate Variance” has increased. Increases in the Re- Lending Rate Variance are caused by the rate available to re-lend the funds for the remaining term having been reduced. This is a result of either:
1. A reduction in the current interest rate for the remaining term, or
2. The ‘remaining term’ used in the calculation having changed to a term with a lower interest rate because of the passage of time (was using the 3-year rate and now using the 2-year rate with a lower rate).
A small change in the current interest rate can have a large impact on the Re-Lending Rate Variance, and thus a large impact on the IRD penalty.
Simply put, if interest rates go up, your penalty will be smaller, if they go down your penalty will larger
A bona–fide sale clause is a contract restriction that forces you to stay with lender until the term is up, unless you sell the property non-arms length. Even then, the penalty when you break the mortgage early if you sell can be much higher than standard mortgage products!
If you try to refinance, go to another lender, or seek lower rates in a more competitive market; the lender will sue you for breach of contract! Avoid bona-fide sale clause mortgage products, even if their interest rate looks shiny and low, it could cost you thousands more in the long term.
What Makes Up Your Credit Score?
The algorithm for calculating your Equifax / Transunion Credit Score can be rather mind boggling. However, it’s actually quite simple what impacts your beacon, and why. Below are the 5 key components of what makes up your credit score:
This makes up about 35% of your score, it’s crucial to pay your bills on time. Even if you miss $5 dollar payment on a credit card, it can produce the same negative effect as missing a $500 payment! Don’t skip minimum payment requirements. Always be aware of whom you owe money to—even if it’s just a parking ticket; left too long and this could go to collections which will damage your score immensely!
This is your level of indebtedness. This is how much of your total available credit you’re using. Try to keep your balance below 35% of your credit limit, and don’t ever go over 70%, even if you pay it off every month. For example, if you have a $10,000 Credit Card, don’t allow the limit to exceed $7,000. It is better to obtain a seperate credit card or increase your limit, then to go beyond the 70% utilization ratio.
Length of Credit
The longer you have an account open, the better. Think of it as a good track record. It shows you’re capable of managing credit.
Types of Credit
It’s good to have a mix of different types of credit to show that you can manage your financials well. But use caution as to what types of credit you have.
For example: A mortgage reporting on your credit history will produce a strong beacon score vs. a payday loan which can show you are a higher risk borrower.
General rule of thumb: Have at least 2 credit cards, a line of credit, and a mortgage reporting for at least 2 years plus and you will be a beacon stud!
Did you know?: 95% of banks require you to have at least 2 credit cards for a minimum of 2 years if you wish to qualify for “A” Credit rates!
These happen every time you agree to look to obtain credit. But there is a big difference between a Hard Inquiry and a Soft Inquiry.
A hard inquiry happen’s when you open a bank account, a credit card, an auto loan etc.
A soft inquiry is when you search your credit history personally, or I help you obtain an report without “inquiring for credit”.
Note: Equifax and Transunion view credit inquiries for different types of credit within the similar time frame as a major red flag that will impact your score. If you are shopping for a mortgage, don’t shop for a Hot Tub or Auto Loan during this period, it could affect your approval!
Mortgage Pre-Payment Privileges allow you to pay down the principle of your mortgage penalty free! Every lender is different. Some lenders have “cheaper” rate options, but only allow 5-10% privilege annually. Standard pre-payment privileges range from 15-30% annually. This may not sound like an important feature if your goal is to simply pay the minimum monthly payments. But higher pre-payment privileges give you more flexibility if you ever need to break your mortgage term early (Selling, Refinancing, Renewing at lower rates etc.).
Renting VS Buying.
Renting vs Buying. Can we equate apples and oranges?
I love the viewpoints on this topic. And have always found it so interesting that people think comparing apples to oranges is ever going to work. It shows there is no silver bullet in this world to make smart financial decisions. Yet, what should we factor into renting vs buying the place we call home?
This article is not an exhaustive list of pros and cons. But rather there key elements that we must define ourselves in making the decision.
- Marketability (Location)
- Peoples definition of “investing”.
I stumbled across an interesting social post this week with someone claiming the math to own a house actually cost them over $161k in the long run, rather than generating equity, or profit; to be more clear. Thus, rather than argue with the numbers presented in the image below. I am going to work with the numbers to attempt an unbiased viewpoint on the cost, and investment of home ownership. (Don’t forget I am a Mortgage Broker, take that with a grain of salt.)
Location and Marketability factor in Renting Vs Buying.
First of all, I am curious where these figures came from (Town? City? Country? ). Is this a house comparable in Beaverdell British Columbia where no one wants to live, or is it on the corner of Grandview and Nainamo downtown Vancouver? Marketability and location is crucial in determining if you can A) Afford to own. and B) It makes sense to own. A market could be so overpriced, it is difficult to even qualify for a mortgage. Or, the market could be so small, it would tough to sell the asset. Thus, owning the home you live in within a region of growth is key to is being a better choice.
Renting VS Buying Kelowna BC Example.
A close person I know purchased a house in Rutland area in the late 90’s for $165,900. (People thought they were insane!) In 2008 before the recession, they sold it for $480,000. The value of that property dropped to $375,000 overnight in 2009. It didn’t rebound until 2014. Even then, let’s pretend he kept that property for the entire 25 year mortgage he original planned to pay off (selling it today in 2021.. 21 years later). BC Assessment shows that property currently assessed at $545,000: Click here to see the property. True sellable value in todays market is likely 590-620k. Maybe even more, the neighbouring property directly across the street I just assisted the homeowner in refinancing to do renovations and the appraisal came out at $650,000. Thus, my estimates are beyond conservative.
But let’s pretend it’s only worth 545k (let’s give these renters a competitive edge here so they feel like they are winning). A few factors I could argue in some of numbers show in the social post above:
Assuming they lived in it for the entire 25 years. Using this math on this post. In the Kelowna area the 158$ a month property taxes are a low estimate, but let’s go with it given the 25 year spread on inflation, and add $25,000 of taxes for Kelowna area just to make home ownership look even worse.
Total Spent = $439,695 + $25,000 + $65,900 (original price difference compared to example above) = $530,595 – 545,000 = $14,405 “profit” according to this post comparison of expenses to own a home.
Sounds pathetic, but what have we forgotten in this Renting vs Buying comparison?
Their mortgage payment at 95% value of the property in 1990 was $156k ($8295 cash down). Interest rates in the 90’s were 7%. Renewing their mortgage every 5 years, rates only went down since, currently at 1.4% today. Lets assume an average here of 4.2% on each 5 year renewal: Click here to see the calculations.
The calculator above shows an initial investment of $8,295. And the long term investment of $96,224.90 in principle paid. With an interest cost of $156,000. Interestingly very close to your $222,361 “total mortgage payments” in the comparable social post.
But what are we forgetting here?
- Their initial investment was $8295. Using “other peoples A.K.A. the bank’s” money to grow that investment. Arguably the investment didn’t grow much if he only came out with $14,505 profit when selling at the end.
- They didn’t lose his $96,224.90 in principle he paid down over 25 years. He got that back when he sold. Something renters will never see.
- Rental history cost. I can not speak for the Kootenays, Beaverdell. Alberta now the entire planet for that matter. But I can speak for the Okanagan when I say: People want to live where they want to live. And when the marketability is strong…. Rental costs are high. I have also yet to meet more than a handful of people in my life who have lived in one property for longer than 5 years. (Including home owners, but I’ll come back to that shortly). Many home owners in Kelowna buy and sell frequently because of spikes in investment value. Sadly forcing tenants to find a new place to live, paying todays new current market rents instead of the 1.4% increase mandated by the province. Can a renter truly equate their 25 year cost of living the same way a home owner could? Thus, you have a homeowner here who:
A) Lived in a house they owned for the entire 25 years (we all know that doesn’t happen). With a monthly mortgage payment on average of $840.75 a month.
B) He moved out of the property after 5 years, but HELD the property for 25 years as a rental property. To rent this property out in todays market is $1400 for the basement suite, and $2000 for the upstairs 3 bedroom unit. Minimum.
I hear renters all the time talk about how it’s cheaper to rent in other parts of the world. Perhaps it is. Yet I find these social posts similar to above also do not accurately factoring in true costs a renter has.
- They assume extremely low rental cost, with zero risk of rate hikes. The true cost of renting when getting kicked out every few years never seems to be a factor. It’s easy to know what something costs now, and turn a blind eye to what costs will be later when you are thinking monthly.
- The money renters put into decorating their rental. Or God forbid, renovating it with their own money! (I see this all the time, why would you do that?) It would be interesting to see what the maintenance expense of $315 monthly in the above example truly equated too when you factor in items renters will also pay for based on lifestyle and creature comforts.
- The cost of contents insurance, ($60 a month).
Maybe these are not an issue in the Kootenay’s, or other parts of Canada (Maybe being a strong word). But if people are still paying $840 a month in rent for a 5 bedroom house in Rutland area in Kelowna in 2021. I waive the white flag.
Renting VS Buying | Should owning a home be considered “investing”.
Note also, my sale value was almost $80,000 less than true market value on this property today. One could argue we are in an overpriced bubble again similar to 2008. But this begs the question. Why does that matter? In 10 years from now, the correction will continue. Taking that initial investment of $8300 (cash down), plus 96,224.90 principle paid over 21 years, plus $14,405 profit when selling, minus shelter costs (which were clearly flawed not including the real costs of renting beyond just the rental payment) plus the $80,000 difference in todays true value = $198929.9 in total equity growth using $8300 21 year ago. According this calculator, that is a 5% annual return on cash down and principle spread payments over that 21 years: Click here to view the return data.
Nothing to sniff at, but what ones who will continue to forget to add in this equation is the true cost of Renting, the inflation of those rental payments, and the cost associated with having to move frequently and pay exorbitantly higher rental costs when relocating frequently.
Lifestyle plays a role in your decision.
My 2 cents: I find it interesting that ones who are so dead set against owning a home, try to spell out mythical magical equations to not own their home and invest all that money into the stock market or some other investment vehicle. But my question is simple for these folks: Why would you not do both? If you can lock in the cost of living early in life through home ownership, combined with the fact the data proves having a mortgage payment is less than renting once the initial investment occurs and you view this purchase as long term. I will say it again; why would you not do both? People need to stop looking at their HOME as an investment opportunity. We need to look at home ownership as a SAVINGS VEHICLE. With the potential for long term growth, and FUTURE rental investment potential. Owning a home will never hurt you.
People will continue to argue what is “cheaper”; renting vs buying. But it’s not even a debate that should exist. What people need to ask themselves is: Does my specific lifestyle and my long term goals make sense to own a property that I call home, which would potentially be a smart investment for the long term?
I would love for home owners to knock on my door 25 years from now and tell me I was wrong. Saying “we should have just rented”, but the majority will not do this because
1). They bought a house which locked in their cost of living 25 years earlier and
2). There will be 1..2.. maybe even 3 recessions between now and then. Yet, they sat patiently, waiting for the correction to occur. And made the decision based on what made sense at that time.
This reasoning also doesn’t change with the stock market, or any sort of investment for that matter. If it is not your full time job or business working that market, it is foolish to play the game of short term day trading/or quick turn around investing. This is simply a coincidental profit, which real estate transactions will also fall prey too. History shows us that investments should never be viewed as a short term profit, unless you really know what you are doing, or the timing was simply great.
Another argument I hear frequently is “But owning a house ties me down! I don’t want to live in it for 25 years, I want to be mobile and free!?” However, if someone can help me understand the difference between locking in their money in open markets (not accessible unless they liquidate IE. “cash out”), versus renting out a property when they don’t want to live in it. If long term home ownership is actually LESS than renting, again I will say it. Why couldn’t you do both?
Renting VS Buying. What makes sense for you?
- Marketability. Where you live right now, is it cheaper renting vs buying? Or in the foreseeable future, Where you live right now if you decided to buy, would it save you money long term by locking in those lower costs today? Answer this question based on your understand of where you live. It is the only question you need to ask yourself. Don’t let anyone else convince you otherwise. You know what’s is going on locally better than the world of social networks would.
- What is investing? People think investing is putting money away and watching compound interest magically grow it. That’s part of it, but investing in yourself and reducing your cost to live is also investing! Meaning; what decisions can I make today that will lock in saving me money for the future? And now?
- Lifestyle, do you care if you get kicked out of your rental property every 3 years? No? Great! Rent. Do you have a family and you feel a consistent routine with a comfort of locking in affordable payments while your little family grows in the area you call home? Or the thought of moving every 3 years makes you scream? Buy a house. And close your eyes and stop watching what the world is doing. Because in 25 years from now. It wont matter, and you wont regret it.
The best part is we are all right, and we all wrong. It just depends when you decided to buy it, and then sell it, and what makes sense for you. Cool topic though, but what do I know, I just put people into debt for a living.
Good Question. Because of our buying power as a licensed Mortgage Broker through the super broker network Verico Finex Lending. We are offered very low interest rates. But on top of that, in order to earn your business for your next home improvement project; we take a large chunk of our commissions earned by the bank and “buy down” the interest rate!
You can and more then welcome too. However the benefit of the Purchase Plus Improvements mortgage is you get an incredibly low mortgage rate PLUS a low renovation loan “All in One”. You will not find any Home equity, line of credit, personal loan, or credit card that comes close to saving you this much interest.
Insured Vs Uninsured Mortgage Rates. Whats the Difference?
The internet is a fantastic shopping tool. Allowing us to source the most competitive and affordable products needed. Yet, searching for a mortgage rate has never been so complicated with all the changes since 2017. Insured vs uninsured mortgage rates really make things confusing. We are here to help!
Insured Mortgage Rates
Insured mortgage rates (ending in a past tense “ed”) means that the borrower is obligated to pay CMHC mortgage insurance. This typically occurs when cash down to purchase a property is less than 20% down.
Interestingly, lenders love Insured Mortgages! The main reason being the borrower is paying the insurance to the government to insure the loan. This takes the risk off the lender completely, allowing them to sell the mortgage as a Mortgage Back Security, or on the bond market. Thus taking it “off the books”.
With less risk, and allowing the bank to free up “liquidity”. Lenders will typically offer the lowest rates on insured mortgages given their funnel through sell off benefits.
Insurable Mortgage Rates
Insurable mortgage rates (ending in future potential “able”) means that the borrow is not obligated to pay CMHC mortgage insurance, having more than 20% cash down. But the lender has the opportunity to “back-end insure” the mortgage with CMHC Canada.
This means the lender can still gain all of the benefits of an insured mortgage, with one caveat: The lender is required to pay the insurance premium.
Most lenders are willing to cover the cost of insuring the mortgage in the “back-end” so they can keep the mortgage off their balance sheet to allow re lending of more funds. However, because they have to cover the cost to achieve this, you will not usually see interest rates as competitive as insured mortgages so they can recoup the cost.
Uninsured Mortgage Rates
Non insurable mortgages mean exactly what the term implies: They do not qualify for being insured or insurable.
This can happen for several reasons:
- The property value is over the insurable limit of 1 million.
- The property is a rental
- The property, or the borrower do not fit insurability requirements (to low of FICO score, property is a co-op…. etc.)
If a mortgage does not fit insurability guidelines. The lender must then keep it on the balance sheet. This then leads more difficulty “reselling” the mortgage if they ever wanted to, along with higher risk on the lender in the event the borrower defaults (misses payments). Thus, Non-Insurable rates tend to be the highest in the market.
Thankfully, Pragmatic Lending has made it extremely simple for you to figure out which rate you will get! Head over to our Canadian mortgage rates page and use our Rate Finder tool to source the best rate possible along with being the best product! Remember, the lowest interest rate you find online does not necessarily mean the best rate. We can’t wait to guide you through the process of saving you thousands! Schedule a digital visit with us today.
Mortgage Broker Fees are not complicated. The simple answer is: Nothing! Zero! Ziltch! A mortgage broker does not charge a fee for their service. We are simply paid a commission from lender we both agree is the best fit for you.
Think of it this way: If you went to a bank today and sat down with a banking officer; that banker is paid a commission to earn your business. What’s the only difference between a mortgage broker and the banker? We represent YOU. Not the bank! Finding you endless options in a competitive market to make sure you get the best product available.*