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Monday, August 15th, 2016

Mortgage Penalties and the Best Strategy to Avoid Them – Find a Vancouver Mortgage Broker Today!

Mortgage Penalties and the Best Strategy to Avoid Them

Adil J. Virani - Vancouver Mortgage BrokerMost people with long-term Vancouver home mortgage will change something in their mortgage before it matures. Some of the changes might include adding a home equity line of credit, refinancing with a better rate, increasing the amortization period, adding money to the mortgage, transferring the mortgage to a new home, or discharging it completely.

Unfortunately for most unsuspecting mortgage holders, in such a situation, a prepayment charge will likely apply. Prepayment charges are also known as mortgage penalties… though financial institutions don’t like to call them that.

In actuality, “prepayment charges” are not supposed to be penalties. They aren’t designed to penalize the borrower. They were originally designed to compensate financial institution doing the lending, for the costs they experience when borrowers pay back their mortgages ahead of their scheduled dates. In most cases, these costs include lost interest. But in addition, vendors also experience origination, securitization, and underwriting costs.

Avoiding a lender with large penalties is one of the best ways for you to reduce the overall cost of borrowing. A trusted mortgage broker in Vancouver can help you do this with a single consultation.

A big problem is that understanding the penalty on a fixed rate mortgage is a lot like say, string theory, pretty difficult, even for those who have some understanding. And it’s been like this for quite a long time. Even worse, these indecipherable penalties can have a large effect on the homeowner’s financial situation, especially if they are a first time buyer who doesn’t know what he or she is getting into.

 

And that has pretty much been the reason why banks have been writing mortgage penalties so cryptically for such a long time; to hide exactly how expensive the penalties are.

Penalties into the thousands or tens of thousands of dollars are not uncommon. And it’s usually interest rate differential charges that hit the hardest. This is the penalty that is supposed to make up for the interest the bank will not be earning now that you are paying off your mortgage more quickly. This can get to be a pretty big number, even if you are using one of the best mortgage rates in BC.

Thankfully for homeowners of the future, the Department of Finance is now requiring banks to explain their mortgage penalties in plain old English, as opposed to the dialect of financial engineering used in the past. Calculators are now being provided on the websites of the big banks so that borrowers can figure out prepayment penalties on their own.

This is nothing short of an epic win for homeowners, including those with Vancouver home mortgages.

Something else to take into consideration is that some lenders will ding you with much higher prepayment charges than other lenders. Things tend to be worse at large banks which can charge up to double what a smaller lender will charge in the same situation.

This happens even though larger banks typically have lower costs related to funding. If this seems strange to you, you’re not alone. Any honest mortgage broker would agree that something is fishy here.

The fact is, the majority of borrowers don’t stick out their entire mortgage term without making changes. While penalties don’t always apply, they can be substantial in some cases. For this reason, it pays to figure out how much your penalty might be before making a switch.

After doing so, there’s a good chance you may change your mind about altering your mortgage. The slightly better rate you might get may not even come close to offsetting the mortgage penalty you’re also going to experience.

 

Before getting into a mortgage, it would be wise to see how future prepayment penalties compare among different lenders. This is something we recommend talking to an honest mortgage broker about.

 

 

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