# Mortgage Renewal, Penalty Analysis



## crr243 (Nov 2, 2015)

Hey all,

My mortgage is up for renewal on March 1, 2016. 
My current rate is 2.99%, 4 year, fixed. 
The initial mortgage was $280,000 amortized to 30 years. It's now sitting at $224,800 with 9 years remaining at current payment rates.
At this point, my penalty to break the mortgage between now and March 1, 2016 is $1681.

I'm starting to shop around given that some lenders will guarantee a rate up to 4 months in advance, though most are 3 months. I'll be looking to renew on a 10 year amortization.

For various reasons, chances are high that my wife and I will sell within the next year. Ideally this will happen before March, but it may last into next fall depending on the Calgary housing market and other various factors.

I ran some numbers on projected penalties (3 months interest) and the cost of interest compared to the increase in net worth (i.e. amount of capital paid off vs amount of interest and penalties paid) for a 3.45% 5-year variable open vs a 1.95% 1-year closed (or, alternatively, a 1.95% 5-year variable closed). I looked at the difference month-over-month to visualize the impact to net worth to enter into an open mortgage vs paying the penalty for a closed mortgage. For simplicity, I used today's mortgage balance of $224,800 as opposed to the projected balance upon renewal March 1, 2016. 


 The Open mortgage pays down capital at $1570-$1620 per month. The interest cost is $595-$645 per month. 
 The Closed mortgage pays down capital at $1700 - $1725 per month. The interest cost is $335-$365 per month.

This is a pretty big difference. 


If I pay off the open mortgage after 1 month, I'll have paid $646.30 in interest and no penalties. Total payments will be $2217.69. However, I'll have paid down capital by $1571.39 for a net worth increase of $925.09. 
If I break the closed mortgage after 1 month, I'll have paid $1087.62 in penalties and $365.30 in interest. My total payments will have totaled $3151.05. However, I'll have paid down $1698.13 in capital, for a net worth increase of $245.21.
 
At month 2, the payments and penalties of the Open total $4435.39 (cumulative) for a capital pay down of $3147.30 and a net worth increase of $1859.22, while with the Closed it's $5206.16 for a capital pay down of $3399.02 and an increase to net worth of $1591.85.

At 3 months, Closed starts to pass Open. Open payments are cumulatively $6653.08 with a total 3-month capital pay down of $4727.74 and a net worth increase of $2802.41. Closed payments, with penalty included, are $7261.32 for a capital pay down of $5102.68 and a net worth increase of $2944.04. At 4 months, the cumulative interest payment for the 3.45% Open mortgage begins to exceed the cumulative interest payment + penalty of the 1.95% Closed mortgage. 

Unless I am missing something here, I see absolutely no reason to sign an Open mortgage unless I *know* that I'll close a sale within the first 3 months. The reduction of penalties does not make up for the increased interest rate past 3 months. 

Does my logic hold?


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## Woz (Sep 5, 2013)

Your logic seems to hold. I checked your math. The only thing I noticed was you appeared to use the yearly interest rate divided by 12 for your monthly rate. Mortgages compound semi-annually, so a 3.45% yearly rate would be (1+3.45%/2)^(1/6)-1 monthly. Doesn’t change the result much though. I found the breakeven point to be 4 months.

I would double check the penalties to make sure it is only 3 months interest and not something like “the greater of …”. I was surprised there’s that much of a rate spread for open vs closed, but that does seem to be the case. Closed mortgage does appear to be the way to go.


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## crr243 (Nov 2, 2015)

Thanks, Woz. I adjusted my formulas and you're right; the change is only a few dollars.

Even at 2 months, the two data sets start to converge. I don't think there's any point in signing an open mortgage in my case unless I have a high degree of confidence that I'll be discharging the mortgage within the first ~2 months of the new term. In other words, I've sold and know when possession transfer will be.


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## marina628 (Dec 14, 2010)

Not sure who has your mortgage but most offer 90 -120 day early renewal offers .Personally I think the 2 year rates look very good right now 2.05% or else I would go variable .


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## crr243 (Nov 2, 2015)

marina628 said:


> Not sure who has your mortgage but most offer 90 -120 day early renewal offers .Personally I think the 2 year rates look very good right now 2.05% or else I would go variable .


I'm currently with TD Canada Trust and their penalty for breaking the mortgage is too high for me to stomach. Because I'm confident that I will be selling and have to pay a penalty, I'm not too interested in re-signing with TD.


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## dougboswell (Oct 25, 2010)

crr243 said:


> I'm currently with TD Canada Trust and their penalty for breaking the mortgage is too high for me to stomach. Because I'm confident that I will be selling and have to pay a penalty, I'm not too interested in re-signing with TD.


Have you looked into porting your mortgage if you sell to avoid paying the fees - assuming you will be buying?


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## crr243 (Nov 2, 2015)

That's a thought. I will certainly be buying again, but I'm not sure how well it will coincide with my sale. Porting is typically only allowed if you do so within 3-4 months of the sale of your former home, and I am considering renting for a few months to get a feel for the new city before committing to a purchase. 

Also I'd like to sign a variable rate mortgage and TD does not allow one to port variable mortgages. Also, TD's variable rates are pretty bad, unless I can find a TD broker who is willing to negotiate.

As an example, I originally owned a home in Saskatoon mortgaged at, I believe, prime - 0.75. When I moved to Calgary, I chose to sell in Saskatoon. TD would not port the mortgage because it was variable. However, the broker agreed to reimburse the penalty if I signed a new fixed rate mortgage with TD. At the time (late 2011 / early 2012), variable rates were at prime (3% at the time). However, TD, was able to match or beat the fixed rates of the other big banks and brokerages I spoke with. I received email confirmation from the TD broker that they would reimburse the penalty fees before I agreed to sign the mortgage on my purchase in Calgary.

After signing the mortgage with TD and moving in to my new home, TD charged me the penalty fees and were reluctant to reimburse. This may be because I signed the paperwork with someone other than the broker I dealt with. It took me a few months to resolve the issue with TD. I had to waive the email confirmation from the broker in front of the bank and threaten to walk away with all of my investments and accounts before they finally retroactively reimbursed the $1,800 penalty.

I'm not sure I want to go through that again.


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## Mortgage u/w (Feb 6, 2014)

Your penalty cost is not that high considering your with a bank - banks tend to use their posted rates to calculate penalties so the result is astounding. If you want to avoid situations as such, you need a mortgage with a virtual lender (or mono-line lender) since their posted rates are always the lowest. 

For your situation, if you know you will sell in the short term, then the open mortgage is the way to go. Alternatively, you can get a HELOC and put the balance on an LOC until you sell. There is no penalty to pay-off an LOC and you can choose to pay interest only in the meantime. Rates on these are usually prime plus 0.50% to 1.00%.

For your new mortgages, my advice is to always stick with variable rates. The most I would recommend is a short term fixed rate for those who can't sleep when choosing a variable rate.


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## marina628 (Dec 14, 2010)

Just curious why your penalty is so high if any as my employee just did a early renewal at TD on her 5 year 2.99% that was coming up Feb 1 ,2016 and they gave her 2.05 variable and no penalty at all.


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## calgarychris (Nov 17, 2015)

*Depending on how fast you want to sell your house*

This all depends how fast you want to sell you house. If you list it with current market conditions do you think it will sell right away?? It could potentially sell as soon as you list it or it could take forever to sell. I guess this really depends how motivated you are to sell your house. Capital saved wouldn't even matter in this situation if you accept a lower offer to get rid of the asset. If you want to keep it for another year then the fixed rate would be the better option. Again it all depends on how fast you can sell your home at the price you list it. Currently it looks like there is more lists then people to buy them.

I do a comparison on my blog of fixed vs variable. You can check it out here. comments are welcome. http://www.thriftythis.com



crr243 said:


> Hey all,
> 
> My mortgage is up for renewal on March 1, 2016.
> My current rate is 2.99%, 4 year, fixed.
> ...


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## crr243 (Nov 2, 2015)

marina628 said:


> Just curious why your penalty is so high if any as my employee just did a early renewal at TD on her 5 year 2.99% that was coming up Feb 1 ,2016 and they gave her 2.05 variable and no penalty at all.


No penalty to pay out the mortgage in full prior to the end of the term? 

I find that very hard to believe at prime - 0.7.


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## crr243 (Nov 2, 2015)

As noted previously, my mortgage is up for renewal in on March 1, 2016. My current stats:

Balance: $224,000 (will be ~$220,000 at time of renewal)
Lender: TD Canada Trust
Amortization: 25 year fixed
Term: 4 year fixed, 2.99%
Maturity: March 1, 2016

I've been watching RateHub and the like, waiting for a rate hold that will extend past March 1st. Over the last few weeks, the good rates have all been only 90 day, which is just past what I need. Today, I started seeing March 24, 2016 from some of the brokers.

I will be calling TD this morning to discuss what options are available for early renewal, but I suspect that they won't be great. Posted 5-year fixed rates at a couple of the big banks went up this morning. I checked this morning, and rates are on the rise at brokers as well. I was seeing 5 year variable of P-0.8 a couple of days ago, and now RateHub is listing P-0.75 as the best available.

As an alternative to TD, I'm thinking of contacting MortgagePal.ca as they currently list a 5-year variable of P-0.75. Does anyone know who the lender might be in this case?

I'll be looking at renewing the following:
Amount: $220,000
Amortization: 10 year variable (yes, down from the original 25 year; I'm currently doubling up payments with 9 years left at my current payment rate...)
Term: 5 year variable
Conditions: 20/20 or better


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## crr243 (Nov 2, 2015)

crr243 said:


> As an alternative to TD, I'm thinking of contacting MortgagePal.ca as they currently list a 5-year variable of P-0.75. Does anyone know who the lender might be in this case?


Scratch that. They jumped 10 bp this morning too, to P-0.65.


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## Ponderling (Mar 1, 2013)

I realize with the current climate of cheap rates that paying out the mortgage by annual 15% contribution and occasional doubling up of payments if you can swing it can make quite a crunch in the outstanding capital, and hence the penalty. 

Read your deal. If it allows annual penalty free capital pay ins, ask that your penalty to be computed after considering that the first 15% is a capital contribution. It can cut the sting of the penalty a bit.


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## crr243 (Nov 2, 2015)

Ponderling said:


> Read your deal. If it allows annual penalty free capital pay ins, ask that your penalty to be computed after considering that the first 15% is a capital contribution. It can cut the sting of the penalty a bit.


I've read the deal. It specifically disallows this.

I sat down with TD yesterday. They offered p-0.4 (2.3%) 5-year variable. That's not as good as I expected. 

However, the gentleman I met with was quick to acknowledge that he isn't one of TD's mortgage specialists and TD often lets the mortgage specialists offer a much better rate than he can. I'll try and get in touch with a mortgage specialist to see if they can improve on that.

That said, I punched some numbers to compare the costs of switching my collateral based mortgage with TD. I assumed the following costs to switch lenders:

Appraisal = $300
Discharge = $300
Lawyer = $850

I also assumed a 10 year amortization and looked at 2.05%, 2.2%, and 2.3%. Balance is $220,000.

If I assume I can get p-0.65 (2.05%) with a different lender, but I have to pay these costs ($1450) to discharge and re-register the mortgage, it'll take me at least _3 years_ to realize a benefit.

The interest savings over 3 years between 2.05% and 2.3% is $1445, assuming the rate is fixed.
If I increase the rate by 0.25% a year beginning next September, 2016, the savings at 3 years is $1456 over 3 years. 
If I increase interest rates by 0.25% every 6 months starting in March, 2016, the difference in interest at 3 years is $1469.

If TD can come down to P-0.5 (2.2%), it'll take me almost the full 5 year term to see a benefit:

At 5 years assuming fixed, the savings is $1296.
For a 0.25% increase every year, it's $1323.
For a 0.25% increase every 6 months, it's $1353.

If I plan on moving within the next 3 years, it might not be worth it to switch lenders even at a measly p-0.4.

I guess that's how TD's collateral mortgage catches you.

Note, however, that none of these numbers are cost adjusted to inflation.


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## crr243 (Nov 2, 2015)

I spoke with another broker. 

MCAP can offer p-0.6 for a portable (90 days to close) variable rate mortgage, 20/20, no appraisal fee (though there is a lawyer fee), and no penalty (with rate retained) to port and increase borrowed amount when we move. 

The total cost to swap lenders will be about $850 ($200 for discharge, $75 to re-register, $500+tax for the lawyer).

This sounds like the way to go to me. It means we pay money (~$850) now to change lenders, but save money (~$1400 penalty) when we move, and the interest rate is a 0.2% improvement. 

I can also use the opportunity to get my wife put on the mortgage with me.


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## My Own Advisor (Sep 24, 2012)

Overall, that sounds pretty good. Anything around 2% variable, with 20/20, etc. is a good deal overall. No appraisal fee and no penalties are good. No?


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## crr243 (Nov 2, 2015)

crr243 said:


> I spoke with another broker.
> 
> MCAP can offer p-0.6 for a portable (90 days to close) variable rate mortgage, 20/20, no appraisal fee (though there is a lawyer fee), and no penalty (with rate retained) to port and increase borrowed amount when we move.
> 
> ...


I followed up with the broker and had him follow up with MCAP. If I increase my borrowing amount when we move, I will lose the rate _and_ have to pay cancellation fees. 

That means, if I switch lenders to MCAP at 2.1%, I have to pay:

*Now*
TD assignment fee: $260
Re-registration: $75
Appraisal: $0
Lawyer: $600
_Sub-total_: $935

*When we move*
MCAP assignment fee: $365
MCAP 3-month interest penalty: $1300
Lawyer: $600
_Sub-total_: $2265

_*Total:* $3200_

If we stay with TD at the higher interest rate (2.2% or 2.3%), we pay nothing now.

*When we move*
TD assignment fee: $260
TD 3-month interest penalty: $1400
Lawyer: $600
*Total:* $2260.00

That's a difference of $940.00.

The savings in interest between 2.3% and 2.1% is, roughly:
1 year: $425
2 year: $810
3 year: $1165
4 year: $1485
5 year: $1768

The savings in interest between 2.2% and 2.1% is, roughly:
1 year: $211
2 year: $406
3 year: $583
4 year: $742
5 year: $883

These numbers are rounded and are the average of 3 scenarios: (1) rates stay the same; (2) rates increase by 0.25%/year starting in spring 2017; (3) rates increase by 0.25% every 6 months starting in spring, 2016.

If I can get a 2.2% out of TD, it's definitely not worth it. If I can only swing 2.3%, it's only worth it if I hold on to the property for 3+ years.


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