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The Mortgage Checklist - Part 3 (The Penalties)

If you're applying for a mortgage, there are some things you will need to know.  As a result, we have created a mortgage checklist, so you can ask your lender/broker the right questions.  Here is part 3 of 9, featuring questions about the penalties.

Penalties

12. Can I break my mortgage any time I want?

Most lenders let you pay a penalty and get out of a closed mortgage early. Some no-frills lenders only let you out if you sell your property. Some don't let you discharge your mortgage at all, until the term is up.

You'll almost always pay a rate premium for an "open" mortgage with no penalties. If you plan to keep the mortgage for more than six months, you're often better off choosing a lower rate and paying the penalty to get out early (if needed).

13. If a mortgage penalty applies, how do you calculate it?

Fixed rate penalties are usually three months of interest or the interest rate differential (IRD), whichever is more. Variable-rate penalties are typically three months of interest based on your current rate.

Penalty calculations based on posted rates (i.e. rates higher than the rate you actually pay) can sometimes be several thousand dollars more expensive. This method is common at most large banks, and is their single greatest weakness. If you want to compare penalties, try some sample calculations using each lender's online penalty calculator.

Some lenders get tricky. For example, instead of a standard three-month interest penalty based on your current rate, some lenders charge three-month interest penalties based on posted rates. Others charge interest rate differential penalties when three-month interest charges normally apply. A few even ding you with 12-month interest penalties or penalties equal to three per cent of your balance. Avoid such mortgages unless the rate savings is significant.

14. Can I port my mortgage to a new property to avoid penalties?

Don't underestimate your odds of moving. Look for good porting flexibility, especially if you're young, need job mobility and/or have a growing family.

Some lenders let you port, but not increase. That forces you to pay a penalty if you buy a pricier house and need more financing.

Note that credit unions typically prevent porting across provincial lines–a problem if you move out of province.

If you have a line of credit attached to your mortgage, make sure you can easily port it as well and keep your rate.

15. How long do you give me to port my mortgage?

The longer the better. At least 60 days is preferable. Some lenders make you close your old property and new property on the same day, which can be unrealistic.

16. Do you deduct interest from my penalty rebate if I port my mortgage and my old and new house don't close on the same day?
 
17. If I break the mortgage early, can I use my unused prepayment privileges to lower the penalty?

Some lenders restrict you from using your prepayment options for this purpose, if you do so within 30 days of discharging the mortgage. Some lenders, like RBC, automatically apply unused prepayment privileges to lower your penalty when refinancing–a cost-saving feature.

18. If the mortgage includes cash back, how much of that cash do I have to repay if I break the mortgage early?

Usually it's a pro-rated amount but some lenders make you repay 100 per cent of the cash back, even if you break the mortgage one day early.

Have your mortgage adviser calculate your "effective rate," including the cash back. That tells you how much of a rate premium you're paying for the cash.