10 May

Watch out for BIG BANK penalty calculations


Posted by: Ian Vowles

Have a client with great credit, income and job stability who is a loyal long-time client of a bank I will call Big Blue.  When she went in to inquire about porting and increasing her existing mortgage to a new property, she was provided with a penalty of $4,000 and a new rate that was 1/4% higher than the best rate I could get her. .  So she came to me and asked what I could do for her.  I compete with Big Blue  on a regular basis and knew that they could do better than that.   I went through a full analysis of her financial situation including her short and long term goals.  I determined the best product for her needs and gave her a rate that would save her the penalty plus thousands more!  Once she had found a property, the client went back to Big Blue about a month later to obtain a penalty quote to pay out her mortgage in full.  She was presented with a verbal quote of over $11,000!  Her mortgage is only $200,000! 

How is this possible you ask?  Well, it turns out that Big Blue uses a calculation that takes into account the “discount off of posted rates” the lucky client received when negotiating her mortgage. What does that mean?  Well, today’s posted rate on Big Blue’s website is 5.14% for a 5 year fixed and yet clients are being offered rates as low as 2.89% or even lower (under the table to certain clients and not others), on a daily basis.  In other words, the posted rate is irrelevant unless you are in bad financial shape or completely stupid.   Yet that same posted rate of 5.14% becomes relevant if you want to pay your mortgage out early because Big Blue uses this same irrelevant posted rate in their penalty calculation!  Without going into great detail about how the calculation works,  the end result is a penalty that is 3 times higher than that of a lender who posts realistic and relevant rates!  These types of lenders understand that mortgage brokers are on top of current market conditions and that they won’t receive any business if the real rate isn’t provided up front.  Therefore, they have no irrelevant posted rates and imaginary client discounts to go by and therefore their prepayment penalties are reasonable and fair.

 Bottom line, this loyal client is stuck at Big Blue. 

Before you sign your next mortgage, please consult a mortgage broker.  At the very least they can explain the penalty calculation up front and let you know if you have been given a fair offer.