I want to outline the pre-payment penalty difference and some competitive advantages of First National at 3.49%. The big banks (CIBC, Scotia, TD, RBC, BMO) are all the same with penalty calculations, whereas the mono-lines (MCAP, First National, Street Capital, ICICI) who deal exclusively through mortgage brokers are more competitive and calculate penalties in a more favourable manner. They have to, because they don’t have the big brand name behind them. They’re only going to get business is they offer better rates BUT most importantly, better products.
“Good” Mortgage Features:
15-20% pre-payment of the original principle amount per year (minimum of $100 a time as often as you’d like. With some lenders having online access to do so).
Up to 100% increase in payment amount per year. Payments may be reverted back to original amount at any time.
Payout: Fixed: 3 month interest or IRD (see below). Variable: only 3 month interest penalty.
Assumable
Portable with up to 120 day gap in closing dates.
Increase/Decrease and Blend option.
Below I’ll compare how the Big Banks (CIBC, TD, RBC etc) calculate IRD penalties and compare to non-bank lenders.
Big Banks: Typically have larger IRD penalties. This is because they use the “discount” you received off their posted rate at the time your mortgage funds and always use that discount when comparing to calculate and IRD penalty.
For this example, if you had a 5 year fixed of 3.49% with CIBC, your discount would be 1.79% off of the posted rate at the time of 5.19%. Therefore, they’d always deduct this from their current comparative term when calculating a penalty. This can be VERY expensive and much more punitive than other lenders.
Here’s TD’s own penalty calculator you can play around with to see how significant this can be: www.tdcanadatrust.com/prepaymentcalculator
Here’s CIBC’s: www.cibc.com/ca/mortgages/calculator/mortgage-prepayment-calculator.html
Here’s Scotiabank’s official policy: IRD Calculation: Take client contract rate + original discount (i.e. posted rate at time of advance) and compare it to their “reinvestment rate” which is typically the posted for the term closest to time remaining in term X Principal amount, Divided by 12 X months remaining in term.
Non-Bank Lenders: Generally have much more favourable IRD calculations for the borrower. As they only deal through professional mortgage brokers they have to differentiate themselves from the banks and provide better products. They’ll compare the actual “contract” rate and disregard the “discounting” (as they don’t have posted rates, only best rates). Plus they compare to even higher posted rates to calculate IRD. Remember, this helps you because the higher the rate for comparison, the better it is for you. Here’s a link to ICICI’s POSTED rates for IRD calculation.
As you can see, they’re much higher than the actual rates they’re offering on mortgages today.
Non-Bank policy: we calculate IRD as the difference between the contract rate and the current POSTED bank rate (of the term equivalent to the remaining term at time of payout) as the reference rate.
Here’s a link to Non-Bank First National and they’re penalty calculator: www.firstnational.ca/Residential/Mortgage-Calculators/Prepayment-Calculator/
Here’s a scenario to illustrate the difference in the 2 above policy differences. Let’s say you paid your mortgage off 2 years from now and you owed $575,000. And let’s assume interest rates 2 years from now are exactly the same as today. I’ve specifically compared CIBC to First National.
Here’s what your payout penalty would be:
Big Bank (CIBC): $24,805.42 (using 3.49% for a 5 year fixed)
Non-Bank (First National): $8,953.84 (using 2.89% for a 5 year fixed)
That’s a difference of $15,851.84. Until the Big Banks change their policies (and the government may eventually force them), It’s hard to support institutions that try their best to take as much as possible from you and me.