# Selling primary residence - Mortgage penalty



## Erome (Jan 11, 2011)

Hi all,

So my fiance and I are talking about what to do with her place.

Hers is a condo that we think we'd like to sell. She has about 200k mortgage left, and probably worth about 290-300k.

She will move into my place and I already have my own place and my own mortgage setup. Her condo is 3.09% mortgage that matures Sept of 2017.

With that knowledge is it better to rent for 2 years until the mortgage penalty is removed, or to just bite the bullet? She will not need to port the mortgage as I currently have mine already setup.

I haven't asked her for the paperwork detailing the penalty to break mortgage, but I'm assuming it's in the 6-8k range... 

Between the possible realtor fees and the possible mortgage penalty, getting into a house is easy, getting out is hard!

Thoughts?


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## NotMe (Jan 10, 2011)

Why deal with uncertainty or ask for strangers advice without details? Find out the actual cost of the mortgage penalty and make a decision based off facts.


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## OhGreatGuru (May 24, 2009)

Instead of guessing, go to her lender and ask just exactly what the penalty is. You can't do a cost-benefit analysis of your options on guesses. You may be in for a shock. A lot of mortgages have moved away from the old standard 3-mos. interest penalty to an "interest rate differential" penalty, which could mean all the interest they would be losing up to the renewal date.

While there, she should ask about possibility of a purchaser assuming the mortgage, and what would be involved, and if this would avoid the penalty.

You haven't said what the amortization period is, or how many years are let on the mortgage. But you should look at the payment tables for the mortgage and add up how much interest she will be paying on it for the next 2 years. Of course, if the bank is going to charge that amount as penalty, you're no further ahead. But if the penalty and other costs are less it may be worth it.


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## Erome (Jan 11, 2011)

Ok so some more information:

It is a 25 year mortgage, currently in a 5 year fixed, She is in year 3 of the first 5 year term, another 2 til maturity of this term, another 22 for the whole thing. 

1. The paperwork says Penalty Calculation is based on differential interest rate

DIR = Your current interest rate - Tangerine comparison interest rate based on your remaining term

(The Tangerine comparison rate is the current posted fixed rate for the amount of time remaining on your mortgage term.)

Penalty is then = Differential interest rate x Mortgage balance x Remaining term


2. or to simplify I can use a calculation title 3 month interest penalty which is

((Current interest rate x mortgage balance remaining)/12 months) x 3 months)

I have no clue what the first calculation means, but I suspect the second one is

((3.09% x 200,000)/12) x 3 months
(7800/12) x 3
1950 = penalty



Does this match what the first calculation is talking about? The paperwork says it is the greater of these two calculations, but I don't understand the first calculation.

I was under the impression from online reading that the penalty would be in the 5-8k range, but perhaps those articles were talking about 500k houses and not 300k condo apartments...

If it's 2k it probably makes more sense to just eat it and sell as opposed to rent for the years. 

Does anyone know what the first calculation is talking about?


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## OhGreatGuru (May 24, 2009)

Quit guessing. Your fiance should ask Tangerine:
a) what the penalty is at the current time; and
b) to send her a copy of the mortgage payment tables up to to the renewal date of the mortgage.


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## nobleea (Oct 11, 2013)

Erome said:


> Does anyone know what the first calculation is talking about?


I assume you go on the tangerine website and see what their posted interest rate is for a fixed 2 yr mortgage (since she has 2yrs left til maturity). That would be 3.24%. Since your interest rate is lower (3.09%), the first calculation doesn't apply. It's basically saying the bank is making 3.09% on your remaining term, but could rent that same money out for 3.24% right now, so it's sort of in their favour.
Then you would use the 3 mo interest penalty.
You have a low rate now. The high penalties are when they had a high rate and the current rate at the bank is much lower.


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## MRT (Apr 8, 2013)

highly unlikely the penalty is that high - call the lender.

the IRD penalty is meant to recoup lost interest when people break mortgages with a rate that is considerably *higher* than current rates. Given that Tangerine's posted 2yr fixed is higher than what she has now, there is no such gap between her rate and the reinvest rate...i.e. she should just be facing the 3mth interest penalty.

still...each lender calculates their IRD a bit differently, so call them and get a quote.


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## Erome (Jan 11, 2011)

Thanks guys! As always, very helpful community!


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## marina628 (Dec 14, 2010)

If you got a discount at time of the mortgage that factors into the numbers too .On a $94,000 mortgage paid out 1 year early ,TD wanted $2300 from us as we got a 1.65% discount off the posted rate .Luckily I could pay $25,000 down plus double the payments for a few months ,it got closer to the $1000 range in the end.


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## Just a Guy (Mar 27, 2012)

If you do sell, find out what your one time payment is, as you can apply that before breaking the mortgage and thus lowering your penalty. There was a whole lawsuit about this years ago and the banks lost. So if you can pay down 15-25% once a year, then it reduces the amount owing and thus the penalties...

I'm probably not explaining this well, as I'm pretty tired today. If you don't get the idea, let me know and I'll explain it better tomorrow.


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## dougboswell (Oct 25, 2010)

If you go back to the amortization schedule she got when she signed you can add up all the interest she would pay for the next 2 years. As mentioned she should call the lender to see what the actually penalty would be. Along with discounted rate penalties some lenders clawback more money if there was a cash amount thrown in.

Another factor is that if she moves in with you it is no longer her primary residence and she would be subjected to capital gains from when she moved in. 

Will house and condo prices fall in the next 2 years? Probably not but you never know. 

Do you to want to get into the hassles of being a landlord for the next 2 years. What if some major repair job has to be done at the condo and a special levy is imposed. More money out that will not be recouped. Sell it now while prices are high, pay the fees, and throw some of the profit into TFSAs and RRSP's . The money you save their in taxes will probably cover the fees from the condo.


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## John Woods (Mar 11, 2015)

*Size of penalty*



Erome said:


> Hi all,
> 
> So my fiance and I are talking about what to do with her place.
> 
> ...


If you mortgage is with a bank very likely your penalty will be reasonable large. If your mortgage is with Tangerine ( formerly ING) it will most likely be 3 months penalty. I mention Tangerine as I saw it sighted in a later post. If it is with a mono-line lender ( non-bank) then it will be larger than the Tangerine penalty but smaller than the bank penalty. All the banks have pre-payment calculators and if it was with a bank the discount they may ask you to put in would be some where around 200 basis points or 2%.

John Woods


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## Erome (Jan 11, 2011)

I'll contact her representative at Tangerine and find out the exact details.

As far as the capital gains she shouldn't have to pay any if I'm not mistaken...

She bought the place in 2009, and is still living there. She will move into my place in May, and we will sell the place in May. From my understanding, it is 100% personal use, and she should not have to report any gains from it. Similar scenario as if she sold the place, and then rented an apartment somewhere, she should not have to report any of those gains as she has been living there the entire time she owned it... correct?


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## Spudd (Oct 11, 2011)

Correct.


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