38 Months in

Doesn’t mean anything to you? Well it should if you are planning on signing a 5 year fixed mortgage rate in the near future. 38 months is the average when people break their five year fixed mortgages. They could be broken for any number of reasons, marriage, divorce, job loss, job transfer or big promotion. The point is that I want to make the experience of you breaking your mortgage ( if you choose to do so) as painless as possible.

So there are a few things you need to know and I will then explain them a little bit further. Interest rate differential, posted rates, discounted rates and three months interest.

The penalty to break a five year fixed mortgage is either 3 months of interest or interest rate differential, which ever is greater. The formula to calculate out this penalty varies greatly between lenders, where most of the big 5 banks using posted rates in their calculation and the broker channel using discounted rates.

Since variable rates are tied to the Bank of Canada prime lending rate and these are short term investments, the penalty to break a variable is based on three months interest.

Five year fixed mortgages on the other hand are based on bond yields. Your lender takes the five year bond yield marks it up then sells it to homeowners as either 5 year posted or discounted rates. Then packages up these mortgages sells them to investors as mortgage backed securities with a guaranteed rate of return over the 5 years. If you break your contact prior to the end of the term you will still owe the bank the missing return, thus the reason the the penalty.

However as I have said not all lenders calculate out the penalty the same way. The big 5 banks use posted rates in their calculation. So I have just run two examples: 1st from big bank blue ( you know who they are), and the 2nd from one of my broker based banks First National. I have used an imaginary start of your mortgage of Feb 26th 2018, 5 year fixed with a rate of 2.79 from both lenders, and a balance of 225,000. Now because they use different rates in their calculation you will have an estimated penalty from big blue bank of $9,925 and an estimated penalty of $2,750 from First National. That’s a difference of $7,175 and yet you both started with the same rate.

This is because the rate you received from Big Blue bank was the posted rate minus a discount, giving you your rate of 2.79. So to figure it out take the non discounted rate from the date your mortgage was advanced, say there is 24 months remaining so the lender will get the rate for the remaining term, and now they get the difference between your non discounted rate and the rate for the remaining term, divide that by 12 to get monthly interest rate and multiply that by 24 the number of months remaining on your term and multiply this by the mortgage amount to get your penalty.

Long story short, if you really must go with a fixed rate then do it with a broker channel lender, if not then variable is defiantly the way to go.

I look forward to hearing from you in regards to your mortgage needs.

Pat

p.s- You can click on this link to start the process whenever you are ready. Schedule your meeting with me here.

p.s.s- I should tell you that I am licensed in Nova Scotia, Ontario(M18001555) & in British Columbia(BCFSA #504098).