A recent article in the Toronto Star highlighted a little
known secret that the banks don’t want you to notice when you sign the
paperwork on a mortgage. If you take a 5 year term and need to end the mortgage
early whether it’s because of illness , divorce , a job transfer or any other
possible reason, if you are less than half way through the term, a condition
called Interest Rate Differential kicks in rather than the 3 months interest
option.
In the Star
article, a RBC mortgage holder found he could not afford his home and he wanted
to sell the home and get out of the mortgage. He was hit with a $13,000 penalty
when money was already stretched to the limit. On one of the last pages of a
mortgage commitment it often states how the IRD is calculated. When you get
your mortgage at a discounted rate, there’s a posted rate shown at the bank.
This rate is often 1 1/2% higher than
the rate you received. While you feel great receiving this rate, it can come
back to bite you in the butt.
IRD;s are
calculated based on the difference between the posted rate and your rate
multiplied by the number of months remaining in the mortgage term. The highest
IRD I have heard of a client paying was $90,000.
A good
mortgage broker will ask you if there’s any chance you will have to end the
mortgage before the end of the term. If
there’s a possibility we take you to a mortgage company or a trust company
rather than a bank. These lenders do not calculate the IRD based on a posted
rate as they do not have one. They often will just charge the 3 month interest
penalty and leave it at that.
This is one more
reason why you should see a mortgage broker for your home financing needs
rather than going to a big bank
Contact me if you need more information on this topic.
David Cooke, your Calgary mortgage broker. The Toronto Star article 
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