Most of the banks base the penalty on the posted rate at the time when you signed your mortgage INSTEAD of your actual rate. This has a large impact on your penalty cost.
Why do so many Canadians break their terms?
Easy answer: life happens. Some people will refinance to take the equity at of their mortgage for renovations, some take the equity for debt consolidations… even buying a new home is considered “breaking.” A portion of our clients unfortunately lose their job or get divorced — you just can’t predict why it happens, but it does.
The best advice I can give is don’t shop for a low rate and save a few extra dollars a month, shop for a low penalty to break.
Let’s examine a $355,000 mortgage: Need Example Illustration Many people ask, “Why are there even penalties in the first place?”
When you return the borrowed money earlier than agreed (“break your term”), the bank has to find another borrower for the remaining term. Since this is difficult to do at the same rate, banks use the penalty to cover their loss.
However, the way these penalties are calculated is key. Review the diagram above and make sure to find out how your bank is calculating penalties – is it the “posted rate” (advertised rate) or is it the actual rate you got for your mortgage (discounted rate)?
And of course, if you want to skip the hassle of penalty calculations altogether — see how much you can afford and start the process with us. We’ve removed penalties entirely by covering the cost for you.