Toronto Real Estate Board Market Report Jan 2012

Do You Know How Banks Calculate Mortgage Penalties ?

Recently, one of my clients brother called me and asked me how can he break his current mortgage and have new mortgage at lower rate ?

I asked him to contact his bank and get estimate of penalty as per the standard mortgage terms.

Here are some general calculation usally banks apply in case of mortgage term break before maturity.

 

There are usually 2 methods are used to calculate penalty,

Three months interest penalty or  Interest Rate Differential(IRD), whichever is high 

Let's see if someone has $100000 mortgage remaining at 4 % on a 5 year term mortgage. Assume that current posted rate is 5.30 % and you just paid 36 months installment.

Here I have shown calculations using nominal rate (as opposed to the effective rate) to assist you understand calculation.

Three-Months' Interest Penalty

(Annual Interest Rate x Balance Outstanding) ÷ 4
(0.04 x $100000)÷ 4 = $1000

Interest Rate Differential

Existing Mortgage Rate = 4 %

Current Posted Mortgage rate = 5.3 % 

Interest Rate Difference = 5..3 -4.0 = 1.3 % 

Interest Differential Penalty Estimate:

Nominal Rate x Balance Outstanding x Number of Years Remaining
0.013 x $100000 x 2 = $2600

In above example bank is going to charge $2600 as penalty for breaking mortgage after 36 months(3 years).

Will Canadian lending guidelines be tightened in the coming months?

Will Canadian lending guidelines be tightened in the coming months?

OSFI (Office of the Superintendent of Financial Institutions) is apparently worried that Canadian banks and mortgage lenders may be making some of the same errors that led to the U.S. real estate and mortgage crisis. According to Bloomberg News, OSFI is specifically worried about stated income lending and home equity lines of credit and the potential for certain borrowers to get into debts they cannot repay. 

However, Bloomberg also notes that the Canadian Banking system has been rated the soundest in the world for four straight years with no Canadian lenders needing a government bailout during the recent recession and credit crisis, unlike the U.S. and European banking systems, which remain precarious.

According to Canadian banking industry figures, the percentage of mortgages in arrears in Canada currently sits at .39 of one percent, hardly a red flag for loan quality in Canada. Even still, there may be some additional tightening of Canadian lending guidelines this year as cautious regulators see how badly the credit crisis has damaged the U.S. housing market and their overall economy, and strive to avoid anything like that in Canada. 

Stay tuned.  In the meantime, if you ever have any questions, please get in touch. We are always aware of the current environment and the resulting implications, so we can help you find a mortgage that gives you an edge and meets your current needs and future goals.

Best regards,

 

Ritesh Joshi
Your Next Door Realtor

www.riteshtherealtor.com

647-281-3424