One of the many important considerations to understand when sourcing the best mortgage is how different types of lenders – namely, banks versus lenders who only work with mortgage brokers – calculate penalties, as the market and your needs can easily shift throughout the term of your mortgage.

Does the lender charge a reinvestment fee as well?

Do they have hidden clauses about firm sales?

Do they charge a premium on top of the interest rate differential (IRD)?  

Below are two examples of how different lenders are calculating penalties. Which one would save you the most amount of money not only when you first get a mortgage, but also if you need to make a change?

Understanding the different available options and the terms lenders use to make more money from borrowers are some key differentiators that borrowers will benefit from only when working with mortgage brokers.

My first consideration when placing a mortgage is to look at lenders who don’t use posted rates!

I know that some lenders charge a high penalty – even when the mortgage term is almost over – as a retention tool leveraged to keep more mortgages on their books!

Following are two quick penalty calculators that compare typical banks versus broker lenders.

Penalty Calculator #1 – Broker Lender (applicable when not opting for a replacement mortgage)

 As you can see, there is quite a difference in the penalty amounts – $4,880.05. And this is a modest calculation comparison. Penalties can be tens of thousands of dollars higher depending on the lender’s specific calculation formula and how far into the mortgage term a borrower is at the time of breaking the mortgage.

 Another hefty cost can come in the form of additional clauses borrowers are usually unaware of if they deal with the lender. These include an additional 1-3% fee in above and beyond the IRD to pay out early.

 Imagine adding another $6,870.00 to the $8,238.72 for a total of $15,108.72 in penalties. This is certainly an amount that could potentially shut out moving as an option for many borrowers, as this amount is enough to eat up real estate commission and an extra bedroom in a home, to say the least.

 Some lenders may have a sale only clause in their mortgage as well. If you think, “Oh, that’s no big deal. I don’t plan on selling,” think again. Throughout every path in life, there are moving parts and uncertainties. When you get married, do you plan for a divorce? Likely not. Did you predict the company you were with for 20 years could downsize or your pension would be reduced or cut? Can you guarantee your health will never throw you a curve ball?

We all hope none of the above scenarios happen to us, but they can. And if they do, having options is extremely important.

You also have to consider that if the interest rate market changes 0.5-0.8% there are opportunities to optimize your mortgage to your advantage, but only if you have the most cost-effective mortgage in the first place, which, clearly, is not based on just your interest rate anymore.

Angela Calla, Mortgage Expert, AMP of the Year in 2009 and Host of The Mortgage Show on CKNW Saturday’s at 7pm. One of the most influential people in the mortgage industry for her sheer volume of people she helps save money on their mortgage, contributions she makes by consulting with Canadian’s national & regional lenders, insurers and media contributions. She and her Port Coquitlam, Port Moody & Vancouver team are here to help you personally at 604-802-3983 or callateam@dominionlending.ca