Today, if you have an interest rate that is over 4% in Canada, then your interest rate is a lot higher than the current interest rate. You decide, that it is time to get a new 5 year term, and you decide to give the bank a call to find out what your penalty is. Your jaw drops as the representative on the other side of the phone says it might be in the thousands or even tens of thousands of dollars; unfortunately, most of us do not have thousands of dollars hanging around that we can use to pay this penalty, so how can you get the prepayment and the discharge penalty covered?
Why is the Prepayment Penalty so High?
The prepayment penalty is a way for the bank to recoup the cost of the borrower breaking the mortgage mid-term. It also acts as a deterrent from people breaking there mortgages to go to another bank. The bank will specifically set there rates in such a way to prevent the clients that they have currently from switching to another bank. If they do not make these arrangements, then they can expect to lose a lot of business to other banks.
Why won’t the bank cover the fee? They make the money back over time plus more
It is easy to assume that the bank will make much more money if they cover the penalty; however, that is not a motivator for the bank. The bank is more interested in getting the profit on their books now, then they are on achieving future profits. This is because the bank cannot predict what interest rates will be in the future, so that future profit could not even exist because of the change in bond rates. Instead, the bank is more interested in booking the profits now instead of later.
How can I get these Fees Waived?
The usual path people try to get these fees waived is by talking to the manager at the bank that they deal with; unfortunately, most banks will not be able to give you any assistance in reducing these rates. You can complain all you wish, but they still have your mortgage, and you will have to pay a penalty to discharge it even if you are unsatisfied.
The best solution against this is to shop. Enlist the help of a mortgage broker to analyze the market to see if there are any lenders that are willing to pay the penalty for you to get your mortgage. Usually there are several; however, it is difficult for the average consumer to find these types of deals without speaking to a broker. The brokers usually have inside deals that they are able to offer on a conditional basis. Remember to shop the market, and do not decide on the first deal that your broker offers you. Instead have the broker offer you several deals before deciding on one.
If you are willing to put in enough time and effort into finding a lender that is willing to cover your penalties, then you can find a deal on your mortgage that is at today’s competitive rates. This can sometimes have dramatic changes on how quickly you pay down your mortgage, your mortgage payments, and the amount of interest you are paying. It is a good idea to give a broker a call and see what they can offer to you.
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