We are now in an environment of lower interest rates. Perhaps you are the person who is sitting in a mortgage rate at 5.2% and the thought of moving to a mortgage rate of 3.30% has you very tempted. Before you do anything, you must be absolutely sure that your mortgage penalty is not going to be a shocking surprise.

There are two formulas used to calculate a mortgage penalty, the first is the standard three month's interest penalty, and the second is IRD: Interest Rate Differential.

The following link will show you how these two mortgage penalties are calculated:

http://www.fcac-acfc.gc.ca/eng/publications/mortgages/PenaltyCharges-eng.asp

Banks will often use the IRD calculation in an environment when interest rates are declining. It is very unfortunate that many individuals do not understand this, or have this explained, when they are negotiating the new deal. I witnessed, this week, a close neighbour, who visited her bank. She was moved from a 4.6% to a 3.6% mortgage rate. She thought this was a wonderful deal, however, she was required to pay a $5,000 mortgage penalty just to get this new rate. I sat down with her, and showed her the amortization schedules based on the two mortgage rates, over five years, and demonstrated that her savings would only be a grand total of $2,000.

She had been misled by the banker to focus only on the "great rate" but her banker failed to properly advise the client that the savings on the lower rate were really washed away by the monstrous penalty amount. A move that was probably motivated by a desire to get a new mortgage deal on the books and bump up their sales numbers and at a very serious expense to the client. Others, I am sure, are all happily breaking mortgage contracts, without really understanding the numbers until it is perhaps too late.

This neighbour had already signed all of the paperwork with the bank and she did regret that she did not understand the implications of the new mortgage. Be careful you are not lured into switching your mortgage just because you are told about a "great rate".....sometimes that "great rate" will result in a handsome penalty that can outweigh any long term savings.

If you are concerned about how your own mortgage will look, with a move to a lower rate, please call me to show you the possible options.

This blog was written by Elizabeth Blair, a Licensed Mortgage Agent with Mortgage Edge in Richmond Hill, Ontario. Elizabeth services mortgage clients in Mississauga and all over the Greater Toronto area. You can contact Elizabeth directly by phone at (905) 510-5785 by email at eblair@mortgageedge.ca or you visit her website at: www.missmortgage.ca Elizabeth is licensed with the Financial Services Commission of Ontario and is also a Member of IMBA (the Independent Mortgage Brokers Association of Ontario) www.imba.ca Lic # M08005880 Brokerage Lic # 10680