Hidden Mortgage Penalties & Impending Interest Rate Hikes

mortgage penalties

The only thing worse than a costly penalty is a hidden one.

For homeowners who are thinking about cashing out some of their equity, the fine print could prove costly. And with interest rates on the front burner for the Bank of Canada (BoC), now’s the time to dust off your mortgage contract.

The financial sector has been buzzing with rumor and innuendo for the better part of a year in anticipation of the July 11, 2018 announcement from the BoC on whether or not it would raise interest rates.

Alas, it did.

Citing recent trade tension, the BoC raised the benchmark interest rate to 1.5%. The industry experts will be keeping a close eye on what will happen next. The next BoC announcement is coming up fast: Wednesday, September 5, 2018.

So if you’re looking to cash in on your home’s equity–or get into another home–your window is wide open, but all signs point to that window closing by year’s end. Now may be a better time than most to cash out. Before you do, here’s what you need to know:

What is a Mortgage Penalty?

In short, mortgage penalties are charged whenever a homeowner opts out of their mortgage contract.

Most of the time, this is to move or cash out equity. Whatever the circumstance, mortgage lenders include penalties in the event that you don’t pay off the loan per the contract.

How Much Are the Penalties?

Most people have no idea.

That’s because policy often dictates penalties, not necessarily the specific contract. So…ask!

Some banks charge a three-month fee (the equivalent of the interest you would have paid over the course of three months), while others use the Interest Rate Differential (IRD), which calculates your interest rate versus the rate the lender would face to resell the property–and charging you the difference. Different lenders use different methodologies to lock in their customers, so knowing exactly how your mortgage penalties work will require some analysis and a frank conversation with your lender.

The ‘Why’ Doesn’t Matter:

Why you’re breaking your contract early doesn’t matter.

The Canadian government doesn’t have the time or resources to consider and analyze the eight out of ten homeowners who break their contract early. And thank goodness! But with that non-discrimination clause comes the harsh reality that it doesn’t matter if you’re breaking your contract due to divorce, job relocation, renovation, or to cover medical or education expenses.

Whether you’re buying, refinancing, or renewing, call us at 519.250.4848 or contact us online to see how we can help you save thousands with the best rates in the industry!

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