I have access to multiple lenders (ie Td, Credit Unions, multiple Monoline lenders) and all things being equal with rate, Monoline lenders have considerably less penalty exposure and flexible prepayment options.

 

1. Mono-line lenders only do mortgages and do not cross sell products such as life insurance, checking/savings accounts, RRSP’s and other related investment products.  I work with secure, reputable, established lenders and many of the mono-line lender sources of funding originate from the big banks.

2. They often offer better mortgage rates, because they don’t have to maintain the expensive overhead of a branch network.

3. Their early payout penalties are often the best in the business and can result in considerable savings.

4. They’re typically backed by major pension funds and Canada’s big banks

5. They offer consumer choice and ensure that our banks remain competitive

6. They won’t bug you to buy other products from them.

7. Monoline lenders do not register a collateral charge on the property meaning that you can transfer your mortgage at renewal to a new lender of your choice.  Unless it is a mortgage with a line of credit component.

8.  I work with secure, reputable, established lenders.

 

Not all mortgage are created equal.  ​ One of the most costly differences between the BIG banks and Monoline lenders is how the BIG banks calculate their prepayment penalty for fixed rates.​  A prepayment penalty comes into effect when the mortgage is paid out (term broken) prior to the terms maturity date.  For example if you choose a 5 year fixed rate and break the mortgage prior to 5 years a penalty comes into effect.

 

Although  your intention is not to break your mortgage, the reality is approximately 6 out of 10 of those that chose a 5 year fixed rate end up breaking the mortgage early.  Therefore it is very important to understand how penalties work because you never know what will happen within the term.  

 

Even though lenders generally use the same type of penalty calculation, the way each lender determines the rate to calculate the penalty can differ considerably, which can result in a much higher penalty and sometimes substantially. 

​

Why people break their mortgage early:​

• Addition to family - Upsize for more space​

• Job loss​

• Separation/Divorce​

• Job Relocation​

• Refinancing into a lower rate (if rates are lower in the future)​

• Consolidating debt to potentially lower your overall monthly payment​

Knowing ahead of time how your prepayment penalty is calculated by the lender should definitely factor into your decision when deciding on a lender/product.​

 

PENALTY CALCULATION

 

Variable Rate

• 3 month’s interest as long as you are floating

​​​

Fixed Rate Mortgage

• 3 month’s interest OR interest rate differential (IRD for short), whichever is greater. 

• We cannot determine the penalty on a fixed rate because it will depend on what the rate is for the term remaining when you break the mortgage.       

 

The following are the “Primary Mortgage Factors” used when banks calculate the estimate IRD:​

1. The outstanding principal owed on the mortgage, not the original amount advanced.

2. The number of months remaining in the current mortgage term

3. Your current interest rate less the rate closest to the term remaining factoring in the posted rate discount.

 

I had some clients referred to me whose current mortgage was with a major bank.  They wanted to refinance their mortgage into a lower rate and at the same time access some equity for home renovations.  I could offer them the better rate but the penalty was abnormally high based on their existing rate and mortgage amount which was less than $150,000.  I told the clients to contact the bank rep and ask them how the penalty was calculated and at first they were sent some generic penalty information.   After probing further they were told that they received a discount of 2.36% which worked against the clients.  

 

The first response is from my client and the subsequent responses were from the bank.

• Thank you for your reply.  I find the information you attached doesn't directly answer my question. Exactly what rate is RBC using to calculate the penalty? What is the Posted Rate that is being used with my existing rate to make the new rate to calculate the penalty? The spread between the existing seven year and our fixed rate of 3.99% doesn't add up correctly.  Could you please provide the numbers used to calculate the almost $9,000.00 penalty you quoted us.​

• You currently have approximately 37.5 months remaining on your mortgage term. The closest term that we have to that is a 3 year term. Therefore RBC uses the 3 year posted rate to calculate the IRD (interest rate differential). Currently, the 3 yr. posted rate is 3.65%.​

• Attached is our website that you can use to calculate the prepayment charge. To assist you with entering the data, your current interest rate is 3.99% which includes a discount of 2.36%. The remaining information you can pull off your online banking. The calculator does not take into account the extra 10% lump sum that you can pay towards the mortgage with no penalty, so you can deduct $20,000 of your principal to calculate the correct penalty/prepayment charge.​

 

Please access the following link which does a great job explaining how penalties work and also mentions the discount calculation as per above:. 

Penalty Calculation Video