# Breaking A Mortgage at Scotiabank. Input?



## crazyjackcsa (Aug 8, 2010)

A little advice would be helpful.

Here is what we have:

$88,700 owing with 3.5 years left on a 5 year fixed at 4.7%

We currently have a plan to pay the mortgage off in just under 9 years.



I'm thinking about breaking it and going variable.



The bank is offering 2.25% for a new 5 year variable.

The catch is there would be about $4,000 dollars in fees (IRD) on top of the new mortgage.

Even with the fees, we would work out ahead, assuming rates stay steady - steadyish.

What I'd like to know is: Has anybody had ANY luck getting the fees knocked down?

What are you're thoughts on rates? Big rise in the next 5 years? Steady? 

WWYD?


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## OhGreatGuru (May 24, 2009)

You refer to them as "fees" but they are contractual obligations clearly stated in your mortgage. 

There is no obvious reason, financially, why the bank should give up money that is owed to them. If you had a longer mortgage period left it might be in their interest to either waive the penalty or knock a bit off the renewal rate in order to keep your business. But you don't have much leverage, and I don't imagine they have much interest in lowering that rate even further. It can't hurt to ask, but I wouldn't be too optimistic. If you have a firm offer of an even lower rate from another company, you could ask them to either waive the penalty or match the rate or you will walk.


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## dogcom (May 23, 2009)

It doesn't sound like a good idea to do it this way. I think you could just blend and extend for five years fixed and get a lower rate but not at 2.25%.

On rates you just don't know if the bond market will blowup or not with all this debt floating around so I don't see any reason to gamble on that now that you have the penalty to pay.


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## Sampson (Apr 3, 2009)

crazyjackcsa said:


> What I'd like to know is: Has anybody had ANY luck getting the fees knocked down?


Not exactly, but we took advantage of a cash back program offered by CIBC - the cash back essentially covered then entire IRD penalty. Only catch is we CANNOT break this mortgage, if we do, we have to pay the money back.



crazyjackcsa said:


> What are you're thoughts on rates? Big rise in the next 5 years? Steady?


How can anyone know this? You could simply look at all the major economists in Canada, take the worse case scenario, then calculate if it still makes fiscal sense to break and take on a variable. Also try different scenarios, with fixed rate mortgages and see what interest rate differential is the minimum needed to come out ahead.


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## crazyjackcsa (Aug 8, 2010)

Sampson said:


> Not exactly, but we took advantage of a cash back program offered by CIBC - the cash back essentially covered then entire IRD penalty. Only catch is we CANNOT break this mortgage, if we do, we have to pay the money back.
> 
> 
> 
> How can anyone know this? You could simply look at all the major economists in Canada, take the worse case scenario, then calculate if it still makes fiscal sense to break and take on a variable. Also try different scenarios, with fixed rate mortgages and see what interest rate differential is the minimum needed to come out ahead.


That's why I asked for "thoughts" I didn't ask if anybody KNEW where rates were going.

"Up" is the simple answer, but how fast? How far?

I also know that the penalty is clearly written into the mortgage. That doesn't mean I can't try to get a better deal.

In the realm of customer service, hanging onto an existing customer is usually cheaper than finding a new one.


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## Sampson (Apr 3, 2009)

crazyjackcsa said:


> "Up" is the simple answer, but how fast? How far?


My point is only whether any of us on this forum have any better chance at predicting what will happen over professional economists? I trust Mark Carney's predictions more than my own, but don't really trust him that much either 



crazyjackcsa said:


> In the realm of customer service, hanging onto an existing customer is usually cheaper than finding a new one.


The problem with this assumption is that they get paid regardless of whether you stay or leave. However, you will find they do push the blend and extend. This is the ONLY way they can guarantee to get even more money out of their clients.

I've personally only dealt with this issue 4 times, and never have I dealt with a broker, bank mortgage peddler, or manager that was willing to wave more than a few hundred dollars.


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## kubatron (Jan 17, 2011)

with your mortgage balance I would not bother switching to variable. Instead I would offer you the following suggestion.

Your rate is 4.79.
Your penalty is $4000-ish.

Step one:

Ask for a "blend and extend" option.
This will bring your rate closer to today's 5-year fixed. Say you can get 3.69% quick-close at MCAP (it's true). Break their balls for the lowest rate or you're leaving. No BS.

They will blend and extend you, ask for in-house legals and free appraisal.

THEN once done, ask what your penalty is. Should be lower.

________________________________________________________________

IF you have done this, then decide what to do if going with variable makes sense. Again, at your tiny mortgage balance I wouldn't do it for a quick buck today, to get kicked in the butt tomorrow (potentially). I fear when rates will start to increase (after elections, of course), they will really rise, fast. 

So if you get 2.25 and your blend-and-extend is 4.2%, you're only 2% hike from it happening. Check this chart and tell me it's not possible within a year or year and a half. Then you've got no ceiling..

http://www.canequity.com/mortgage_rate_history.stm

(remember, average prime rate is about 4.7% minus discount)

25 year chart of prime vs fixed:

http://freepdfhosting.com/f513b05e84.pdf


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## kubatron (Jan 17, 2011)

crazyjackcsa said:


> That's why I asked for "thoughts" I didn't ask if anybody KNEW where rates were going.
> 
> "Up" is the simple answer, but how fast? How far?
> 
> ...


final thought;

figure out the amount the bank will lose over next 3.5 years at your mortgage in interest. (my math shows approx $11, 400 = 9 years at 4.7% $87K semi-annual). 

Show them this number.

Show them a pre-approval from any other bank at a better rate.

AND - if you have chequings/savings etc., threaten them to move this amount over.

(scotiabank is notorious for not caring, their branch level people stink and know very little so you won't get far, just a thought)

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as for the philosophical debate about "fees" and why we SHOULD pay the banks, that's a whole other ball game. All I will say by working in this industry is that it's a joke - the contracts written are terrible complex for common folk to understand ESP with the IRD penalty - and usually the banks sway the rates used in their favour tremendously.


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## Jungle (Feb 17, 2010)

Scotia told us last week that we can break the mortgage and save 20% of the IRD fees, BUT only if we renew with scotia. Now I don't know what kind of rate you will get, whether it will be competitive, you'll have to ask. 

Also you can do early renewal at 6 months before your term is up, no penalty.


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## kubatron (Jan 17, 2011)

This is true, but try the blend+extend option first and then see how much lower the penalty is.


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## OhGreatGuru (May 24, 2009)

kubatron said:


> ...
> 
> --------------------------------------------------------------------------
> as for the philosophical debate about "fees" and why we SHOULD pay the banks, that's a whole other ball game. All I will say by working in this industry is that it's a joke - the contracts written are terrible complex for common folk to understand ESP with the IRD penalty - and usually the banks sway the rates used in their favour tremendously.


My objection to calling it a "fee" is that fee sounds like something the bank is charging you arbitrarily for doing some paperwork. It is a "penalty". OP signed a fixed-rate mortgage for a specified term, and the bank had a reasonable expectation of making a specified amount of interest on the loan over 5 years. If mortgagee *asks to cancel the contract prematurely*, mortgagor is being done out of future earnings, and it is not unreasonable that the contract requires compensation as a penalty. 

If mortgagee wanted a variable-rate mortgage, they should have opted for that the last time and taken the attendant risk. It's not reasonable to sign a no-risk fixed rate mortgage, and then 1.5 years later say "Gee, since rates have gone down I've changed my mind, now give me a variable rate mortgage and don't charge me a penalty."


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## kubatron (Jan 17, 2011)

My problem with penalty is that the penalties are charged in a vague method and never easily understood by the mortgagee, although I fully grasp your idea behind having to pay to the mortgagor for interest lost.


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## Jungle (Feb 17, 2010)

On the back of the Scotia mortgage documents, it gives a worksheet, on how to figure out the IRD. (it's approx, pretty close)

With our mortgage of 5.14%, I noticed that if the posted rate(s) on Scota's website goes up, the IRD becomes lower in the caculation.

Your mortgage is simular and the IRD could come down, if BOC increases prime this year.


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## Jungle (Feb 17, 2010)

kubatron said:


> My problem with penalty is that the penalties are charged in a vague method and never easily understood by the mortgagee, although I fully grasp your idea behind having to pay to the mortgagor for interest lost.


Scotia posts this on the back of their customer's mortgage documents. I posted this in another thread, from a few months back. I found it again and will re-paste it here:

On the back page, it gives you an IRD calculation and includes the discount you received, on your mortgage rate. 


A= The annual interest rate on your mortgage
B= The current annual interest rate for a new mortgage, with a term that is the next closest to the remaining term of your existing mortgage, less the discount of ??% you received on your existing mortgage. (discount will have been printed in a box on last page) (next closest terms posted on Scotia website)
C= A-B, which is the difference between your existing interest rate and the discounted rate. Write C as a decimal; for example 6%= 0.06
D=The amount you want to pay off
E=The number of months left, until your mortgage term expires
F= (C x D x E) / 12 (estimated interest rate deferral)

* the larger amount will be closest to the actual amount, we may also add a $200 administration fee. 

I wonder how many customers knew they had the fomula in their mortgage documents? I do admit, it can be slightly off, (like a hundred bucks) due to accrued principal payments.


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## K-133 (Apr 30, 2010)

Jungle - thanks for the post.

Does this apply for paying it off early in general, or only if you are going to pay it off early and get a new mortgage with them?

FYI

I found this calculator:

http://www.canadianmortgagetrends.com/canadian_mortgage_trends/interest-rate-differential-ird.html


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## Sampson (Apr 3, 2009)

kubatron said:


> This is true, but try the blend+extend option first and then see how much lower the penalty is.


Can someone actually confirm this?

Although the 'differential' of interest rates will be lower, you will be locked in for a longer period, therefore the amount of penalty to be paid will also be proportionately greater.

We broke a mortgage with Scotia a couple of years ago and the estimate from the back of our contract was certainly an underestimate. Make sure you call in to your bank and CONFIRM the exact, up-to-date penalty, then don't even trust that.

We went into a branch and dealt with a service rep, they calculated the penalty on the spot, AND that was wrong. I can confirm and attest to Scotiabank's poor customer service. It was terrible, and there will be no chance I'd ever take a mortgage with them in the future.

They did push the blend and extend option as do most bankers, they make more money that way.


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## Four Pillars (Apr 5, 2009)

From what I've seen - "blend and extend" is just a different way to pay the IRD fee.

The new interest rate will be at a higher interest than you could get with a new mortgage (although lower than your old rate). The term will be longer than your existing remaining term, which essentially means that the mortgage company will make the same profit as they would with your old mortage and the client gets to feel like they are getting a 'deal'.


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## Sampson (Apr 3, 2009)

Four Pillars said:


> From what I've seen - "blend and extend" is just a different way to pay the IRD fee.


That's my understanding also. I think for a customer, it ONLY makes sense if you cannot make the payments at the existing higher interest rate. I've done a bunch of this math, and even if you roll the penalty into the new mortgage, if the interest rate differential (old vs. new) is wide enough, you often still come out ahead by breaking.


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## kubatron (Jan 17, 2011)

I can confirm this with the following example.

Mortgage $330,000 at 5.46 - 2.7 years left.
Penalty $14, 500
Blended rate: 4.38% (when rates were 3.6s)
No penalty - extended to 5 years.

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2 weeks later my client walked into branch, suddenly penalty dipped to $8500 after he blended and extended, no material change to rates at that time.


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## kubatron (Jan 17, 2011)

worst case scenario - you have a new mortgage at a lower rate and haven't paid a dime of penalty but are extended longer.

best case scenario - your penalty is lower.


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## Sampson (Apr 3, 2009)

re-ran some math.


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## K-133 (Apr 30, 2010)

kubatron said:


> I can confirm this with the following example.
> 
> Mortgage $330,000 at 5.46 - 2.7 years left.
> Penalty $14, 500
> ...


That $14,500 is pretty close to what the calculator spewed out at $16,500.

The blend and extend seems like a good deal to me. By the example you provided, he got the average of the 2 rates, by doubling his term. 

In fact, if you run it through a calculator, you pay less interest per year over 5 years than you do per year over 2.7. On top of avoiding a penalty.


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## Mortgage Guy (Jan 26, 2011)

*How to reduce penalties*

Crazy if you are still looking for how to get that penalty reduced let me know as I have been a Mortgage Consultant for 11 years and work with a Lawyer that specializes in doing this.. Would be glad to help.


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## dougboswell (Oct 25, 2010)

*Beaking mortgage*

Perhaps looking at it from a different point of view is not to renegotiate now but to make an anniversary lump sum payment. If you have cash on hand either increase your mortgage monthly payments or make a lump sum payment. Most mortgages are written so that you can increase either or both by 15%-20% annually. By reducing the principal owing more of monthly payment goes to the balance left. In 3 and 1/2 years when you renew you might look at a variable rate then. Your will still be paying less than a fixed rate and might only have 5 years left.


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## crazyjackcsa (Aug 8, 2010)

No dice getting the fee lowered. My wife and I do make mortgage prepayments (12 a year) but we were hoping for a better rate.


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## Shayne (Apr 3, 2009)

It is all about the math and knowing the logic behind it. Unfortunately I have not found anyone who does it correctly.

With the right circumstances you can save thousands of dollars by breaking your current mortgage. 

In September and October I moved 12 clients to a new lender. After paying the penalty and legal fees they saved between $4000 and $13,000. All for about 2 hours of their time.

I was getting paid to save people money, dream job!!!


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## GeniusBoy27 (Jun 11, 2010)

CrazyJack: They weren't willing to lower your fees if you blend and extend?

Go to the manager and ask them to go up the chain. It may be that your mortgage numbers may not make it worthwhile for them to do it ... but on a blend and extend, I'd be surprised that they wouldn't move on the fees.

My bank certainly has.


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## crazyjackcsa (Aug 8, 2010)

GeniusBoy27 said:


> CrazyJack: They weren't willing to lower your fees if you blend and extend?
> 
> Go to the manager and ask them to go up the chain. It may be that your mortgage numbers may not make it worthwhile for them to do it ... but on a blend and extend, I'd be surprised that they wouldn't move on the fees.
> 
> My bank certainly has.


Sure, but not enough to make it worthwhile. Extending and blending the mortgage down is fee free, but, with 3.5 years left at 4.7 + 1.5 years at 4.0 percent wasn't enticing enough.


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## GeniusBoy27 (Jun 11, 2010)

But wouldn't that still be better than what you have now, especially since all reasonable projections are for interest rates to rise? I think I'd work out the numbers to see what the various options provide.


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