TD Charges Woman $30,000 penalty to Break her Mortgage during Covid-19 Crisis
Perhaps you saw this headline last week. A woman who lost her income as a realtor, lost 2 tenants and could not keep up the payments on her home. As a result she sold her home in April before prices dropped. What she did not expect was the penalty for breaking her mortgage to be so high. She was expecting a 3 month interest penalty which would have been around $3000. Instead the bank used a little understood clause which says ” 3 month interest or the IRD (Interest Rate Differential) , which ever is greater. ” . This resulted in a penalty of $29,530 ! If you check your mortgage paperwork you will find this if you have a fixed rate mortgage. Here’s a definition of IRD
Interest Rate Differental
The IRD is a compensation charge that may apply if you pay off your mortgage prior to the maturity date, or pay the mortgage principal down beyond the amount of your prepayment privileges. The IRD is based on:
1-the amount you are pre-paying and
2-An interest rate that equals the difference between your original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of the mortgage.
source: Canada Mortgage Trends
How do you avoid getting whacked with a huge penalty for breaking your mortgage? The first thing to do is get your mortgage arranged through a Dominon Lending Centres mortgage professional. We are well aware of these penalties and one of the first questions we will ask is if you think you will be breaking your mortgage during the term. If so we will recommend a variable rate which would have a 3 month interest penalty or taking a shorter term . If your job isn’t secure we will keep you away from these lenders as well.
Finally, most mortgage companies and trust companies that offer mortgages don’t have a posted fee. As a result, the IRD for many of them is 75% lower than the banks. You may not know that but your trusted DLC mortgage advisor does. Remember, in the future always go to a mortgage broker, we will save you money, time and aggravation every time.