How to Spot a "Twist of Rate" When Calculating Mortgage Penalties
Calculating the penalty to break a fixed mortgage should be straightforward - you'd think.
Most mortgage holders would calculate a 3-month interest charge by taking their mortgage balance, multiplying by their interest rate, and dividing by four, right? Usually. Unless of course your lender calculates the penalty with a different rate than your contract rate. That's what I call a 'twist of rate'.
Sad but true, a few lenders actually raise the rate they use to calculate 3 month penalties and typically base your penalty on the posted rate at the time you closed the mortgage, instead of your actual rate. That could mean a big difference for the average mortgage holder. By the way, there is no legislation to prohibit this practice either. "The calculation itself is a business decision", says Natasha Nystrom, Communications Officer at the Financial Consumer Agency of Canada.
The bottom line is when you're comparing two mortgages and the rates are equal - beware - because all other terms will rarely be the same. To level the playing field you could opt to:
- Read the contract's fine print to determine what the penalty rate would be should you break your fixed mortgage - or -
- Work an Accredited Mortgage Broker like Tracy Irwin to help you figure out the best option for your situation.
Remember the rate you get doesn't determine the interest you pay.