Mortgage Payout!!! [Old Thread- new questions]

[albertGQ]

Man, I need to rant.

I am in the process of buying out my roommate so my fiancee and newborn can live there. He moved out months ago to live with his girlfriend. The mortgage is in both our names. The principal we owe is $302,000. We have less then three years remaining in our term at 5.60%. Mortgage started in January 2007 I beleive.

ATB compounds their interest on a semi-annual basis. So they're telling me adding the interest ($4,541.43) with the payout penalty ($12,656.35), the total payout is $319,201. Does this seem right?

We bought the house for $320,000. Put 5% down, so after the CMHC premiums of 3.15%, our total mortgage was $313,576. Does this make sense to anyone here that my payout penalty is almost $6,000 more then my mortgage amount after 27 months of mortgage payments?

I should have some idea how this is calculated as I am a mortgage underwriter, but I don't and I am pissed at this. I was looking forward to buying out my buddy and getting a much lower rate from Oxlong.

Anyone know how to calculate this for me? I can give more information via PM if necessary

Thanks

[ah123]

Try this one... http://www.ic.gc.ca/eic/site/oca-bc....g/ca01817.html

[troutman]

Penalties used to be three months interest. Often the penalty will be waived if you continue to do business with the lender.

[I_am_Beast]

why not get a line of credit linked to the house, use it to buy out the old roomate, then just have his name removed from the title and morgage.

[Mike Oxlong]

Penalties are 3 months Interest or IRD (interest rate differential) whichever is greater.

Because rates are so low right now IRD comes into play on most occasions. I have the formula somewhere and I will dig it up for you.

Sorry to hear that man. That sucks the payout penalty is really that high........

[Deegee]

Not every company uses the same mortgage penalty calculation. Refer to your Mortgage's clause and then compare your own numbers that you calculate.

I've seen 3 months or IRD, only 3 month penalties, and some 6 month (wow!) penalties. It's all part of the risk you mitigate by obtaining a fixed rate Mortgage or a significantly discounted floating rate Mortgage.

[Mike F]

Originally Posted by albertGQ

ATB compounds their interest on a semi-annual basis. So they're telling me adding the interest ($4,541.43) with the payout penalty ($12,656.35), the total payout is $319,201. Does this seem right?

The fact that it's compounded semi-annually shouldn't matter for a standard mortgage.

Every refinance I see calculates the payout as follows:

Balance due after last payment +
Per diem interest since last payment +
Prepayment penalty +
Discharge fee.

Unless your per diem interest adds to $4,541.43 (which would make no sense), you've either been quoted a wrong figure or have contractually agreed to a ridiculous additional penalty for paying out early over and above the standard 3 month interest (or IRD) penalty.

[evilcougar]

very true. a lot of companies do not charge pre pay penalties the same way. i have a few clients who's first mtg's are with resmore and agf (they seem to be the worst offenders i've seen so far). they are locked in for their term meaning if they want to pay out early they must pay the remaining payments left in their term plus 3 or 6 months interest.
i tried to do a deal for one of my clients who's first is with resmore, i recieved a payout statement and the pre pay pen was 47k. NOT LYING. the client lost her mind when i told her, she called resmor to confirm this, and it was indeed NOT a typo.
its very VERY important to read all the fine print before signing anything to do with a mortgage...

[Jedi Ninja]

$12,656.35 sounds close for an IRD calculation given that ATB has a 30 month rate posted right now at 4.09, which I am guessing would be the rate used for the IRD calculation. The other $4000+ makes no sense to me, though.

[Deegee]

With semi annual compounding Mortgage your payment goes directly to principle while interest continues to accrue until it is added to your principle twice a year.

There are some places that do Mortgages where interest is calculated in a monthly manner where your payment pays accrued interest outstanding first, and then the remaining portion on principle.

In this case the $4,000 is the interest that has been accrueing in the background and has not yet been added to the principle balance.

[CrazyCaper]

I have to re-open this thread. My wife and I are in the process of refinancing throught a different lender(moving over to Scotiabank from Investors Group). Our current mortgage is approx. $321k with 26 months remaining on a 5yr term with an interest rate of 5.34%.

Our lawyer just received the payout statement from our current provider and they are asking for a payout penalty of over $18k. I almost lost my mind.

Does this amount sound right? They have indicated to me that they calculate their payout penalty based on IRD but their new 5yr posted rate(5.25%) is almost identical to my current rate(5.34%).

I have found some penalty calculators online, and even if they are basing it on their "special 5yr rate" of 3.99%, it should only be around $9k. What am I missing here?

Help.

Thanks,
CrazyCaper

[mykalberta]

+1 - the 12K is normal - its the IRD

The remaining interest is a peculiar fee. I am in a similar position and PC Financial is only going to charge me the IRD. Which funny enough goes down by almost 50% if interest rates rise 0.25% in June

FYI - The penalty calculation is not regulated there for its different for every bank.

[8sPOT]

Originally Posted by CrazyCaper

I have to re-open this thread. My wife and I are in the process of refinancing throught a different lender(moving over to Scotiabank from Investors Group). Our current mortgage is approx. $321k with 26 months remaining on a 5yr term with an interest rate of 5.34%.

Our lawyer just received the payout statement from our current provider and they are asking for a payout penalty of over $18k. I almost lost my mind.

Does this amount sound right? They have indicated to me that they calculate their payout penalty based on IRD but their new 5yr posted rate(5.25%) is almost identical to my current rate(5.34%).

I have found some penalty calculators online, and even if they are basing it on their "special 5yr rate" of 3.99%, it should only be around $9k. What am I missing here?

Help.

Thanks,
CrazyCaper

The IRD penalty takes into consideration the original discount you were given when you took the mortgage. Basically, your original discount is applied to todays comparable rate (roughly the number of years left on the term). So if your original rate is 5.34% with a 1.3% discount you would take 1.3% off todays 2 year posted rate.

Then the difference between those two rates is what the principle is multiplied by. Then multiplied by the number of remaining months and divided by 12.

I have seen penalties that high, so I think you may be SOL unless your further ahead when getting the better rate through Scotiabank.

[Flames in 07]

looks about right ... they were expecting a 5.6% return. now they'll take that money, lend it to someone else and get far less of a return, so they want to be kept whole to the original bargain.

If this concept didn't exist, then everyone would have a free option and everyone would run from their fixed rates right about now if they negotiated before late 08.

[Mike Oxlong]

These IRD penalties are really hurting people right now who are trying to get out of their mortgages. I have seen some ridiculous numbers from people who are trying to refinance.

One thing to keep in mind though is to try and take advantage of your pre payment option before you pay out the mortgage. Lenders will usually allow you to put down a lump sum payment of anywhere from 15% - 25% of the principal amount once a year.

So if your mortgage amount was $200,000 and your lender allowed you to pay 20% penalty free, make sure thy are calculating that IRD penalty based on $160,000 not the full $200,000.

[Clarkey]

woops

[Peanut]

Originally Posted by CrazyCaper

I have to re-open this thread. My wife and I are in the process of refinancing throught a different lender(moving over to Scotiabank from Investors Group). Our current mortgage is approx. $321k with 26 months remaining on a 5yr term with an interest rate of 5.34%.

Our lawyer just received the payout statement from our current provider and they are asking for a payout penalty of over $18k. I almost lost my mind.

Does this amount sound right? They have indicated to me that they calculate their payout penalty based on IRD but their new 5yr posted rate(5.25%) is almost identical to my current rate(5.34%).

I have found some penalty calculators online, and even if they are basing it on their "special 5yr rate" of 3.99%, it should only be around $9k. What am I missing here?

Help.

Thanks,
CrazyCaper

Hey, CrazyCaper. Based on those penalties, I think the answer is not to refinance right now? Hopefully you guys can get out of doing any refinancing if it's not too late... not sure if you're moving? Maybe port the mortgage instead, if so.

We looked at refinancing last year and found ourselves in a similar situation - about $16k in penalties to refinance. So we decided there was no benefit and just sucked it up and stayed the course with our >5% rate for another 30 months.

[photon]

Gotta run the numbers to be sure, sometimes it could still be worth it.

Scotiabank called the other day offering I think a fixed 5 year at 3.69% or something like that.. Our current rate is prime - .8 variable (so 1.4% right now) so I was going to say no outright, but figured I'd try and figure out what mortgage rates would have to be when I need to renew in a couple of years.

Turns out it isn't as close and I'd thought, from a straight payment point of view the mortgage rates in a few years would only have to be 7% or so to make it worth switching now, even with a penalty.. not completely inconceivable.

Once you look at the amount being paid towards the principle though it's a no brainier to stay at the super-low rate.

[onetwo_threefour]

One thing to add. There are a couple of lenders who don't use mortgage rates for caculating IRD's but bond rates instead. It is extremely important to understand how any penalty may be calculated before signing a commitment.

I have seen clients with penalties in excess of 35K!

Be careful...

If I can remember which lenders I will edit my post.

Edit:
There's a usefuk discussion here: http://mortgagehelp.ca/penalties.htm

But it doesn't name names...

[onetwo_threefour]

Originally Posted by Mike Oxlong

These IRD penalties are really hurting people right now who are trying to get out of their mortgages. I have seen some ridiculous numbers from people who are trying to refinance.

One thing to keep in mind though is to try and take advantage of your pre payment option before you pay out the mortgage. Lenders will usually allow you to put down a lump sum payment of anywhere from 15% - 25% of the principal amount once a year.

So if your mortgage amount was $200,000 and your lender allowed you to pay 20% penalty free, make sure thy are calculating that IRD penalty based on $160,000 not the full $200,000.

Great advice, but some lenders still refuse to build the privilege into the calculation and require the borrower to actually make two payments to minimize the penalty, first the privilege, then order a new payout statement, then the balance. TD comes to mind. It's a good idea to ask the lawyer who will be paying out the mortgage if they know how the penalty is calculated. We charge a small fee to make the extra payment and order a second payout but it can save clients hundreds or sometimes thousands of dollars. (Ie if you have 20% privilege you may be able to save 20% of the penalty if the lender doesn't credit it automatically)