Most people believe their penalty is going to be about 3 months interest. Which is true of most closed variable rate mortgages. However, fixed rate mortgages have a feature called Interest Rate Differential, or IRD. Lenders are not keen on letting you break a higher rate mortgage to get a new lower rate mortgage. They use the IRD to ensure they don’t lose if you decide to do this. (Canadian banks are smart remember? )

Basically if you got a 5 year 5.5% mortgage 2 years ago and wanted to break your mortgage for a 5 year 4.00% mortgage today your lender is going to charge you the difference between your rate and the current rate. Which will turn out to be a lot more than 3 months interest.

For instance I have seen $200,000 mortgages with $10,000 penalties because of the IRD calculation. In order to get an equivalent 3 months interest the mortgage rate would have to be 21%! ($200,000 at 21% is $3,356 a month!)

The reality is for some people the penalty on their higher rate mortgage is too high for them to consider breaking their mortgage. It is worth having a mortgage planner do the math to see if you will end up saving money or not. There is no point in paying your bank a hefty penalty just so you can say you have a shiny new sub 4.00% mortgage. What follows are 3 ways you can legally lower your penalty if you are considering breaking your mortgage early.

1. Utilize your prepayment privilege
Most lenders have an annual prepayment option. Usually somewhere between 15%-25%. For instance, if you can prepay your mortgage by 15% you will reduce your penalty by 15%. Since your penalty is based on your outstanding balance at the time of payout. There are 2 ways to accomplish this:

• Use cash or other credit to make a lump sum payment on your mortgage before you pay it out. (Be careful, some lenders have a clause written into their contract that will prevent this. Do your homework first)
• Ask your lender to reduce your penalty by the prepayment amount. Often if you are planning on staying with the same lender they will lower your penalty by the prepayment amount. ING Direct does this.

2. Blend and extend your interest rate

Another option you can consider is blending and extending your mortgage. Basically here is how it works: If you are in a 5.00% mortgage with 2 years left until maturity, call your lender and ask them what would your rate be if you blended and extended your mortgage for another 5 years. Blending and extending means you are signing up for another 5 years.

You may be thinking, why on earth would I want to extend my term since I plan on paying off my mortgage anyway. The reason is your penalty is calculated based on your rate versus the current rates. I just recently did this with my mortgage here is what happened:

My mortgage $200,000

My rate; 5.19%

My blended rate: 4.18%

Penalty based on the 5.19% – $7,500

Penalty based on the 4.18% – $3,500

As you can see I cut my penalty in half.

(Be warned this will not work with every lender. Some lenders will not let you blend and extend unless you increase your mortgage. Contact me if you want help with this)

3. Readvanceable strategy -

You must have a readvanceable mortgage for this to work. (A readvanaceble mortgage is a mortgage and line of credit that are linked. As you pay down the mortgage your line of credit limit increases. Scotiabank does this, so does Manulife one, National Bank and many others.)

Here is how it works:
Assume you have a mortgage of $200,000 at 5.5% and a line of credit of $50,000 at 4.00% with a zero balance. Take the $50,000 from the line of credit and use it to pay down your mortgage. This will effectively reduce your $200,000 mortgage to $150,000. If you were planning on paying out your mortgage you just reduced your penalty because your penalty is calculated on what you owe.

Like in strategy 2 if you reduce your mortgage amount your penalty will usually decrease.

If you are facing a big penalty and want advice on how to tackle it please contact me and I’ll be happy to see what we can do to help you.

Should you go fixed or variable? Or both? This is the question many homeowners ask. In my latest video I explain the difference between them and highlight one of the misconceptions people have with variable rate mortgagees.

I also offer some very basic advice to help you decide which is better for you. In my opinion the decision should only be made within the context of your current financial situation. For some people a variable can be too risky, for others it is perfectly acceptable.

As always if you have any questions please contact me.

The truth is the Walmart executives will have their work cut out for them.

What does this mean for traditional banking? And does Walmart have any hope of challenging the Canadian Banking industry? -God I hope so. (but I’ll get to that in a later post)

Last I heard there were over 40 applications for Canadian banks in Canada. It seems everyone wants a shot at the Canadian consumer. This will be good news for fee sensitive Canadians but will Walmart’s foray in the financial business end poorly like Canadian Tires’ did?

Of all the retail and grocery store giants attempting to enter the financial space Walmart may actually has a decent chance of succeeding, provided they don’t muck it up.

When Canadian Tire entered the mortgage business a few years ago it just seemed weird to me. I couldn’t imagine sitting around a dinner party and telling my friends about my Canadian Tire mortgage. The brand didn’t seem to make sense to me.

To be fair Canadian Tire had a really good mortgage product for while. It was a strong competitor to the Manulife One and the National Bank All-in-One product, but it just didn’t have any sex appeal and it never really got any legs. (pun intended)

Now granted having a Walmart mortgage is probably not going to be considered sexy, but when I think of Walmart I immediately think -low prices. I can envision a Walmart Bank running on razor thin margins and passing the savings on to their customers.

I think if the Walmart bankers are smart they will enter the market gradually. Much like ING direct did when they came to Canada. ING established a strong foothold by offering a really great high interest saving account. It got them noticed and built brand loyalty.

I think Walmart’s chances for success are much higher if they can build a flagship product and build some momentum.

If they come out with every service imaginable I suspect even if the prices are low the service will probably suck. It takes time to build a quality service team.

I for one am excited the retail giant it treading into the banking industry. Whether they survive or not the increased competition will rollback rates on mortgages and lower the cost of other financial products.

What do you think?

Life insurance is the type of thing you buy and hope you never need. Unfortunately not all types of life insurance are created equal.

One type of insurance I do not like is “Creditor Insurance” it is when you have life insurance on a loan or mortgage. Basically, it will pay off the loan in the event of a claim. This sounds wonderful, but can actually be a huge problem for young families.

CBC did a review on some of the problems a couple years ago.. To be fair not all types of Creditor Insurance are the same, but as a general rule it is better to get life insurance separate from your mortgages and loans.

In this video I talk about the problem a young family could face if they choose Creditor Insurance instead of getting a separate life policy.

In 5 years of mortgage brokering I have never sold a single policy. When I first got into the industry I did my homework and realized there were cheaper and better alternatives. I recommend borrowers speak to a licensed life insurance agent.  Don’t ever buy it from your banker or broker unless it is just for temporary coverage.

Disclaimer: If you currently have Creditor Insurance and want out -do not cancel it until you talk to a qualified life insurance person.

If you are considering buying a home don’t forget about the importance of location. A busy street is likely to be less desirable and less marketable if you ever need, or want to sell. This video highlights one of the dangers of living on a busy street.