# Pulling a bait and switch on banks?



## Max (Apr 4, 2009)

Just had a sketchy idea I wanted to run past everyone.

When I sell my house before the end of my mortgage term, I will be forced to prepay the mortgage, which will incur penalties of 3 months interest plus a closure fee.

If I were to renegotiate my existing mortgage without selling my house, the bank is likely to waive some or all of the prepayment penalties.

What if I were to renegotiate my existing closed mortgage to a fully open mortgage prior to selling my house. As long as the bank waives the prepayment fees from the closed mortgage to the open mortgage, I would then be able to sell my house and pay off my mortgage without incurring any penalties for prepayment.

Any flaws in this plan?


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## takingprofits (Apr 13, 2009)

You could call your bank to confirm they are willing to renegotiate and they are willing to allow you to switch from a closed to an open mortgage.

Are you not buying another property? You could always port your mortgage to the new property and bypass penalties that way.


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## Mike H. (Apr 15, 2009)

Max said:


> Just had a sketchy idea I wanted to run past everyone.
> 
> When I sell my house before the end of my mortgage term, I will be forced to prepay the mortgage, which will incur penalties of 3 months interest plus a closure fee.
> 
> ...


Firstly, the penalty could be far greater than three months' interest. The penalty written into most contracts is "the greater of 3 months interest or IRD for the remainder of the term". For a $200K mortgage with 3 years remaining of term at 6%, the IRD penalty could be as much as $12,000.

Secondly, banks are generally not stupid. I don't think you would be successful in switching into an open mortgage without penalty.

Your options, as I see them, are:

1. Port your mortgage to a new property (assuming you are buying a new one).
2. Talk to the lender honestly about what you want to do, and how to minimize your costs. I know of one lender that will refund a three month penalty if you take a new mortgage from them within one year of paying out the old.
3. Allow the purchaser of your home to assume the mortgage. Talk to a professional about assumability and possible liability in your province first; but this could actually be a selling feature and increase the proceeds of your home.
4. Suck it up, buttercup. Live up to the contract you signed. Pay the penalty and move on. The same lender referred to in point 2 (a major chartered bank) has an internal ****-list of customers and a forever-memory. People on the poop list will never be able to borrow from this bank again. With only 5 (4,...3,...) major banks in Canada, a person shouldn't limit their options.

Anyone know of other options? Is this a real situation, or a hypothetical born out of boredom?


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## Max (Apr 4, 2009)

Mike,

1) I'm embarassed to say I didn't know you could port the mortgage to the new property. Great suggestion.

3) Having the purchaser assume the mortgage. Again, great suggestion.

4) Didn't know about the black list, but it does seem plausible. Another good point. Do you have any further details on this (what kind of things get you on it and how to avoid it)?

This was a hypothetical scenario, and I think you have shown that it is not a good idea for most people, but assuming that I would never bank with this institution again and that I was planning to rent for the rest of my life (although this is probably not the case), this would work or is there something else that might hinder the plan? It is at least a possibility, although again, I think you have proven it to be a poor one.

Thanks for the great advice!


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## Elbyron (Apr 3, 2009)

> 3. Allow the purchaser of your home to assume the mortgage. Talk to a professional about assumability and possible liability in your province first; but this could actually be a selling feature and increase the proceeds of your home.


Given today's rates, a 6% 3-year mortgage doesn't really sound much like a selling feature. But I know some banks allow you to pay for an "interest-rate buydown", where you pay a certain amount to have them reduce the rate for a agreed upon period of time. You could then advertise an assumable 3% mortgage to get people interested, then when they're ready to make an offer you reveal that the 3% is only for a limited time. Or, you could even buy down the rate for the entire 3 years, but it might not be any cheaper than the IRD. I recently bought a house and assumed a 5.2% mortgage on the condition that he reduce the price to compensate me for the additional interest I would pay for the remaining term (vs a new mortgage of a similar term). This saved him a couple thousand, and he shared some of the savings. Plus, the legal fees were less for assumption of a mortgage.


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## Mike H. (Apr 15, 2009)

Max said:


> Mike,
> 
> 1) I'm embarassed to say I didn't know you could port the mortgage to the new property. Great suggestion.
> 
> ...


Any written-off loss to this bank can get you on the poop list. No matter how small.

As for the other poster, the example of 3 years left on a 6% mortgage is hypothetical. I don't know what the original poster's mortgage terms might be. 

However, a 6% mortgage could be attractive to assume for a person who cannot qualify for a mortgage themselves, due to unprovable income (recently self employed) or bad credit. It is common for people to come out of a divorce with destroyed credit. They might presently have the ability to pay a mortgage, but not the ability to qualify for 2 years.

In Alberta, all mortgages are assumable. If the mortgage is not CMHC insured and the person defaults on the assumed mortgage, there is no liability or negative credit repercussion to the seller. The lender's only recourse is to the property. I can't speak for other provinces.

Every mortgage assumption situation needs to be reviewed with a lawyer. Many times a lender will try to block an assumption by refusing to issue an assumption statement before qualifying the purchaser, but there are ways around this.


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## johnsazzr (Apr 20, 2009)

Mike H. said:


> Firstly, the penalty could be far greater than three months' interest. The penalty written into most contracts is "the greater of 3 months interest or IRD for the remainder of the term". For a $200K mortgage with 3 years remaining of term at 6%, the IRD penalty could be as much as $12,000.
> 
> Secondly, banks are generally not stupid. I don't think you would be successful in switching into an open mortgage without penalty.
> 
> ...


All accurate points...porting the rate to a new property is generally the best way...you generally have 3-12 months to do so depending on the company.. At the same time, take advantage of the under 4% rates and blend your old term...its a win win..


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