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Wednesday, July 27th, 2016

Give me a break on my mortgage break fee!

By lesleyscorgieMetro Canada

I recently sold my house and have decided to get a new mortgage through a mortgage broker rather than my bank.

So, I met with my bank last week to discuss the transaction and learned that the cost to break my existing mortgage is nearly $5,000!

Hogwash! For $5,000 I could take a three-week European vacation or contribute the annual maximum amount to my tax-free savings account.

Mortgage prepayment charges are the costs to “break” your existing fixed-rate mortgage contract.

They exist because the lender has to borrow the funds needed for the mortgage from the market. When a borrower “breaks” a mortgage, the lender is charged a “breakage cost,” which is passed along to the borrower to offset the cost that the lender is charged.

Prepayment charges are typically calculated based on the greater of three months interest penalty or interest for the remainder of the term on the amount prepaid calculated using the interest rate differential.

The interest rate differential is the difference in the interest payable on your existing mortgage versus that payable on a replacement mortgage, calculated on the time remaining in your existing mortgage term.

To determine whether it’s worth switching lenders, I’ve followed these steps:

1) Take emotion out of the equation and let math dictate the decision.

2) Evaluate whether the new lender has a more attractive interest rate, term and flexible repayment schedule (such as accelerated payments, double-up payments or annual lump sum contributions up to 10 per cent).

3) Using a free online banking mortgage calculator (available at any major bank or mortgage website), calculate the break-even rate needed to make it worth switching.

4) Confirm with the existing lender, by phone or in person, the exact fee. Present this information to the new lender and begin negotiating for either the fee to be lowered or to have the new lender pick up part of the tab.

Switching mortgage lenders only makes financial sense when a borrower can save money. In my case, I’ll save thousands of dollars (over the lifetime of the new mortgage) by making the switch, but I still have more negotiating to do before I can pull the pin on my existing mortgage.

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