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$15,000 to Break Your Mortgage?

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More people are starting to figure out that mortgage breakage penalties can ravage their family budget. An Oshawa woman recently learned this the hard way.

Jill Groves was stunned when TD Bank quoted her $15,092 to break her mortgage early, according to a CTV story.

“I was shocked, because breaking the mortgage wasn't in my thoughts. I had no intention of breaking the mortgage when I signed up for five years,” Groves told CTV.

Few people ever do.

This issue came up because she was forced to sell her house, which is co-owned by her husband, due to the sudden end of their relationship.

Because she wasn’t planning to purchase another property—which would have allowed her to port her existing mortgage—a breakage penalty was levied by her bank.

As our mortgage editor, Rob McLister, wrote in the Globe and Mail on November 13, there are two types of penalties you can be hit with when exiting your mortgage early: bad but fair, and much worse.

“Fair” vs. Outrageous Breakage Penalties

If you were wise enough to get your mortgage through a “fair penalty lender,” you’d usually be looking at a cost of just three months' interest to break your mortgage before maturity.

If you had a fixed-rate mortgage and rates fell a lot, you’d possibly face an interest rate differential (IRD) penalty, which is the difference between your contract rate and what a lender could charge borrowers today for a similar term (similar to your remaining term).

If you got a big-bank fixed-rate mortgage, like Groves, there’s a higher chance you’d pay an expensive IRD penalty.

Because of the big banks’ inflated posted rates (which nobody actually pays), their penalties can be sky-high.

The difference between a “fair penalty” lender and a major bank can be staggering.

On a 3.19 percent, $300,000, 5-year fixed mortgage with four years remaining, the penalties could look something like this:

  • $2,400 — This reflects three months’ interest at a “fair penalty lender”
  • $16,800 — This is what one big bank charges for its IRD penalty with the same assumptions.

This is a classic reminder that when searching for your mortgage rate, the lowest rate often doesn’t equal the cheapest mortgage. Saving a few thousand in interest doesn’t mean much when stuck with a penalty that’s $14,400 higher.

A Happy Ending

In the end, TD took pity on Groves (either that or it wanted this negative media story to disappear) and worked with her to port her existing loan to a new mortgage.

Given the size of the penalty, Groves decided to find a new property right away. Porting allows you to move your mortgage to a new property and avoid a breakage penalty altogether—so long as you meet the lender’s criteria for a new mortgage.

Fortunately, CTV reports that Groves was indeed approved.