Downside of low rates present opportunity

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The low-interest-rate environment enticing many homeowners to switch mortgages is a perfect opportunity for brokers to coach their clients on how to avoid steep penalties.

“Mortgage penalties and how banks calculate them is a hot topic among brokers and our clients these days,” said Steve Garganis, broker for The Mortgage Centre, in Oakville, Ont. “I foresee it getting worst especially in this low-rate environment.

“Remember, rates are only half the picture: Brokers can help clients determine if a low interest rate is worth breaking an existing mortgage and absorbing the accompanying penalties.”

The current rate environment is bringing that point home, with the penalty for getting out of fixed-rate mortgage before the end of the term dependent on the difference between the mortgage`s interest rate and the current rate but also on the length of the outstanding term.

“In some instances these outrageous IRD calculations result in borrowers racking up penalties of anywhere from $20,000 to $30,000 on a $300,000 or $400,000 loan,” according to Garganis.

Banks generally calculate IRD by simply getting the difference between the rate the borrower has on a loan and the current market rate.

“If the current rate is higher or equal to the borrower’s rate, there is no penalty,” said Garganis. “However, the lower interest rates (ushered in) about two years ago, result in higher penalties,”

Earlier this year, also reported on concerns that some banks are posting “artificially high interest rates” and “baiting” borrowers with discounted interest rates.

“Borrowers lured by the discounted rate could end up being dinged when the time comes to refinance,” said Keith Leighton, broker at Mortgage Intelligence – Ideal Mortgage in Halifax. “That’s because, some banks calculate IRD based on the difference between the current rate at refi and the posted rate at the time of the loan, not the discounted rate given to the borrower.”

  • Donna D'Amico on 2012-09-18 8:54:26 AM

    I just read the article on how bank mortgage specialists are passing them selves off as mortgage brokers, and now I read this article on how banks are handcuffing clients on penalties. I am a new mortgage agent, and I am just wondering what our industry is doing about it; I pay IMBA fees so I would like to know what this institution is doing to help protect well I constantly get asked to become a CAAMP member and get my designation....but again I am not certain what these institutions are doing to protect us against such harmful impacts to our lively hood.

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