BREAKING A MORTGAGE CAN INCUR STEEP PENALTIES; IT PAYS TO BE INFORMEDWhen a Fixed Rate can be Riskier than a Variable Rate So you’re not a risk taker and you may want the security of a fixed rate, but did you know that a Fixed Rate can be riskier in certain circumstances than a Variable Rate. If you should get sick, lose your job, divorce or that unexpected expense happens and you need to break your mortgage, you will incur more penalties depending on the type of rate you have and the lender. In this edition of our Comparemyrate.ca Thursday Roundtable we will be delving into the Fixed Rate, Variable Rate question by giving you information on the Interest Rate Differential (IRD) or Mortgage Penalty. What happens if I need to break my mortgage, what is the penalty? We always wish to remain positive, see the glass half full, but what happens when the unforeseen happens and you can’t pay your mortgage, what would the penalty be or what if you rates have plummeted but you are still paying a high rate? With a Fixed Mortgage, the penalty to break your mortgage is the Interest Rate Differential (IRD), and with a variable rate, is only subject to the three months interest penalty. To give you an example of what the difference may be, we will use two scenario’s using 12 months and 36 months remaining on your term. Please be aware, these scenarios are just an example and your mortgage broker can give you a better idea, we are using this only as a guideline. As you can see, the longer time remaining on the term the more penalty you will incur. Scenario 1 - 12 months remaining on your Term
Current Mortgage Balance $300,000 Current Interest Rate 5% Discount you got off posted rate 1% Months Remaining on your term 12 The Lender's Comparison Rate 3.75%Penalty Variable $3,750 - Fixed $6,750Scenario 2 - 36 months remaining on your Term
Current Mortgage Balance $300,000 Current Interest Rate 4% Discount you got off posted rate 1% Months Remaining on your term 36 The Lender's Comparison Rate 3.75%Penalty Variable $3,750 - Fixed $20,250If you made the decision to get a Fixed Rate, how can you protect yourself, your family and your home? Mortgage Default Insurance only covers the lender so you may want to look into other types of insurance such as Mortgage disability insurance or Life Insurance. We are not suggesting a variable over a fixed, nor telling you what rate is best for you, but what we are doing is giving you more to take into consideration when purchasing a mortgage. Purchasing a mortgage is a long term commitment and we want to provide you with the best information on both choices, and is the reason why we wrote this blog. You now have more factors to consider for choosing your best mortgage rate option and have more questions to ask your Mortgage Broker on Fixed versus Variable. Contact your Broker for more information; it pays to be informed.