The Big Banks and Their Penalties
As Mortgage Brokers, one of the main reasons we use mortgage companies, called Mono-Line Lenders, versus the traditional Big is because typically rates are lower, but mainly because they calculate penalties much differently. The method of calculating a penalty is much more favourable than any large bank’s “Interest Rate Differential” calculation. It can save Clients a significant amount of money if a mortgage needs to be broken before the term is up.
You may recognize the names of some of these “Mono-line Lenders”, such as First National Financial, MCAP, CMLS, Merix, etc., and I use these all of these Lenders regularly. Instead of calculating penalties using the 'IRD' (Interest Rate Differential mentioned above), they use a different method which essentially considers your actual mortgage interest rate and compares it to a current interest rate (if a new term was to start that day) and charges interest based on the amount of time remaining in your term. The Big Banks method of the ‘IRD’, compares your actual interest rate to the Bank’s “Posted Rate” which is generally significant higher than the current rates available to Clients, and calculates the interest based on the remaining term. The difference can be THOUSANDS!
So, most people may be thinking, well why would I even break my mortgage? There are several reasons why, and you should not be naïve in thinking that you may not come across one of these situations:
- Debt Consolidation (possibly a life event occurred that resulted in some debt accumulation)
- New Home in the Middle of your Mortgage Term (family size increased, new job, dream house)
- Lower Interest Rates Available (Yes, sometimes it can be worth it to break and incur the penalty to save more money in interest)
- Unfortunate Life Events (Death, Divorce)
I have been providing Mortgage Services for 30 years, and I still have Clients hesitant to “try” some of these Mono-line Lenders. We are so accustomed to using the Big Banks, and until technology took over, there may have been the need to visit a branch to discuss your mortgage. Now, most services related to your mortgage after it is funded can be done electronically (even self serve!) or by phone, so there is no need to limit your options to only 5 or 6 Lenders. The Mono-line Lenders provide low rates, generous pre-payment options, great customer service and of course, LOWER penalties if it was ever needed.
This article is a general overview of the different methods used to calculate penalties, but there is still far more to factor in – such as blending & extending, porting, the amount of pre-payment penalty you have, and more. If there is a chance you need to break your mortgage, please come review and discuss your options with me to make a knowledgeable and informed decision!