How to break out of a mortgage commitment, part 3

 
How to decide whether you should break out of your mortgage:

Deciding to break out of your mortgage can be a complicated and painful task. I have seen many people who are reluctant to pay the penalty fee because it often cost thousands. Yet, it would save them much more if they do break out.

I have also seen many people miscalculate the savings and cost to break out of their current mortgage.

To keep it simple, if your mortgage interest, whether fixed or variable is about 2% higher than the rate you can get approved today including variable, then given today's financial conditions, you should break out of it. For example, if your mortgage interest rate is 4% and the approved lender variable or fixed rate is 2%, then you should break out of it. Using simplified math, a $200 000 mortgage at 4% is around $8000 in interest where at 2% is only $4000 in interest. Doing so, cuts your mortgage interest amount in half each year.

This is a very general rule of thumb and there are always exceptions to these rules that you need address. I do not know your conditions personally, but if you post your situation, I may be able to answer it.

Procedure once you have decided to break out of your mortgage:

The procedure is complicated. First the current lender is reluctant to break out of the mortgage. Thankfully there are laws in Canada that force the lenders to behave. However, you, as the client, need to do your part to make sure all parties are following the process.

Assuming you are breaking out of the mortgage from your current lender and going with another lender...

1. After you have minimized the penalty fee by making the largest prepayment, your new lender should fax a discharge request to the current lender.

2. After this fax, you should contact the current lender and make sure the fax has been received. Often times, lenders fail to receive such fax. (Whether intentionally or accidentally to delay the mortgage exchange process))

3. After the current lender acknowledges the request to discharge has been received, then the current lender has forty-eight hours to respond with the mortgage break out fee, which would be the cost to break out of the mortgage. Often times, lenders would claim they need longer than forty-eight hours, but the law does stipulate forty-eight hours.

4. Once the mortgage break out fee is faxed back to the new lender, you need to contact the new lender and make sure the break out fee is the fee you expected. Lender tend to change the fee and up the fee suddenly. (Whether by accident or intentionally.)

5. Once the mortgage break out fee is acknowledged, the new lender would then get you to sign and make the change.

Once that occurs, the mortgage exchange process is complete..

Bottom Line:

One may believe their mortgage broker should advise you on this, but the truth is, they won't. In fact they want you to know as little as possible so that you can only listen to them. The mortgage broker has their own agenda. It is only in the best interest of the mortgage broker that you break out of the mortgage, so that he can collect the commissions with the new mortgage.  Also, if you do use a mortgage broker, all fees will be paid by you.

How to break out of a mortgage commitment, part 2

...continued from part 1

2. Discharge fee

It is really a fee on top of the penalty fee. So you are already paying the penalty and now the lender want to add another fee to make even more money. This fee is often around $275-$400. When first signed the agreement to accept the loan, you also signed an agreement to pay a discharge fee at the documented amount specified by the lender.

Work Around:

One way to avoid this fee is by using the same lender. Make sure you ask your lender first. Sometimes, your new lender is also willing to cover this fee.

 
3. Appraisal Fee

Penalty fee and discharge fee gets you out of the mortgage and so now you need to find a new lender. To do that, you will need an appraisal once again. This fee is ranges from $200-$400

Work around:

This fee can be covered by the new lender. If you use the same lender, you should not need an appraisal.

4. Legal Fees

If you are getting a new lender, your new lender may expect you to get lawyer for the changes. If you are refinancing, meaning you want to borrow more money, then it is possible, even your current lender is going to expect a lawyer to make these changes.

Work around:

Because it is a mortgage change as oppose to a new property, some lenders are willing to ignore this legal fee. Other lenders are willing to cover this fee.

Go To Part 3...

How to break out of a mortgage commitment, part 1

Background:

A mortgage requires that you are locked in for a certain number of years depending on your mortgage agreement. Most likely you had committed yourself to five years. With this commitment, you agree to pay the lender a certain amount in interest which may be Fixed or variable. If this interest becomes too high relative to current mortgage, you may look into breaking out of it.

So in deciding whether you should break out of your mortgage is knowing all the FEES and how to work with or around it.

Fees:

1. Penalty Fee

This should be your biggest fee. Your penalty fee depends on your mortgage amount, interest rate and remaining years you are locked into the mortgage.

How Penalty Fee is calculated:

If your mortgage interest rate is the same or less then the current comparable rate, then you will be charged three months interest. By comparable, I mean fixed compared to another fixed and variable compared the variable. Otherwise, your calculation would be something like

number of years remaining * interest rate difference * mortgage amount.

I won't get into the details because you should always ask your lender what the exact amount should be and ask them how the calculation works.

Work around:

Since the penalty fee is always based on the mortgage amount, you should aim to make the largest prepayment possible. This will reduce the penalty fee by an equivalent percentage. So for example, if you can make up to a 20% prepayment. Then by doing so, you will reduce your penalty fee by 20%.

If you chose to break out of the mortgage, but still use the same lender, then you should not have make a prepayment. Your current lender should give you a discount because you are already using them and they are the once charging you this fee. Mathematically speaking, however, this discount is always equivalent to the prepayment amount. If the prepayment amount is 20%, then the discount amount is 20%. This actually means there is no special discount in terms penalty fee, if you are able to make the maximum prepayment amount.

Another thing you can do is risk and wait until the current interest rate climbs to the interest rate you are paying. Let's say for example, your fixed rate is 4%. If you believe that the interest rate for fixed will quickly climb to 4%, then you can pay the shorter fee of three months interest. This risk is that you could very well, be wrong.


Go To Part 2...