So what's the deal?

**Definitions**

**Break Mortgage**- You are cancelling your mortgage. This happens when you refinance or sell your property.

**Mortgage Penalty**- It's the penalty fee the bank will charge you when you cancel your mortgage before the term is up.

**Mortgage Term**- This is how long you are locked into your mortgage. Common mortgage terms range from 1 year to 10 years. If you break your mortgage before the term is up, you will pay a penalty.

**1. What is the Bank Trying to Get Back with your Penalty?**

The logic is this: If you go from a 5% rate down to a 4% rate and you have 4 years left on your mortgage, they want the interest difference that you would have paid over those 4 years. In this scenario the bank is looking for a 4% penalty fee, 1% difference for 4 years.

**1a. Logical Penalty Fee**

**Case Study**

My Existing Rate = 5%

Current Market Rate = 4%

# of Years Left In Term = 4 Years

Mortgage Amount = $300,000

**1b. Logical Penalty Fee Calculation**

= (Rate Difference Between your Rate and Current Market Rate)*(# of Years Left in Term)*Mortgage Amount

= (My Existing Rate – Current Market Rate)*(# of Years Left in Term)*Mortgage Amount

= (5% - 4%)* 4 Years * $300,000

= $12,000 Penalty Fee

**2. Real Life Case Study**

Mortgage Amount - $300,000

Interest Rate - 2.89% Fixed

Term - 5 year Term

Amortization - 30 Years

Payment - $1247/month

**3. Here is the Short Answer for a $300k Mortgage:**

Break Mortgage After 1 Year - $7,200 Penalty

Break Mortgage After 2 Years - $13,410 Penalty

Break Mortgage After 3 Years - $13,200 Penalty

Break Mortgage After 4 Years - $6,600 Penalty

**4. What is the Exact Equation Used to Calculate your Penalty?**

Some banks do not use the

**Logical Penalty Fee**calculation, instead they like to use a calculation that creates tens of thousands of dollars in extra penalty fees for every single fixed rate mortgage.

Let’s go back to the calculations:

Logical Penalty Fee = (My Existing Rate –

**)*(# of Years Left in Term)*Mortgage Amount**

__Current Market Rate__**4a. How do some Canadian Banks calculate**

__Current Market Rate?__Magical Current Market Rate = Current Posted Rate - Discount

**4b. What is Current Posted Rate?**

The banks have two types of rates, the first is called posted rates and the second is called discounted rates. Twenty years ago when mortgage information was not readily available as it is today, posted rates were offered to the client, then as a sales strategy, the bank would say “OK since you are such a great customer and you are loyal we will give you these discounted rates”. The real discounted rates are the real market rates. As below, discounted rates are being called "special offers". Not exactly special considering every other bank is offering the same special offer....

**4c. How is the discount calculated?**

As above, let's assume you took the special 5 year offer at 3.89%. The current posted rate was 5.34%. The discount you received off the posted rate was 5.34% - 3.89% = 1.45%.

In our case study, the client has a mortgage of 2.89%. The posted rate at that time was also 5.34%. His discount would be calculated as 5.34% - 2.89% = 2.45%.

**4d. What's the difference for Logical Current Market Rate vs Magical Current Market Rate?**

Current Logical Market Rate = 3.59%

Magical Current Market Rate = Posted Rate - Discount = 4.74% - 2.45% = 2.29%

**Logical Current Market Rate @ 3.59%**

So, imagine having a mortgage of 2.89%. The current 4 year comparable rates are at 3.59%. If we decide to break the mortgage the bank will make more money by increasing our rate to 3.59%. It's beneficial for that 2.89% to be broken.

**Magical Current Market Rate @ 2.29%**

*What the bank is saying, is even though our comparable rate is 3.59%, we are actually going to pretend that it is 2.29%. Therefore your 2.89% mortgage is being reduced to 2.29%, you now have to pay us that interest difference that we are pretending to lose over the next 4 years.***4d. Magical Penalty Fee Exact Calculation**

Magical Penalty Fee = (My Existing Rate –

**)*(# of Years Left in Term)*Mortgage Amount**

__Current Market Rate__=(My Existing Rate –

**)*(# of Years Left in Term)*Mortgage Amount**

__(Current Posted Rate - Discount)__**5. Breaking Your Mortgage After 1 Year, 4 Years Left on Term**

My Existing Rate - 2.89%

Term Left on Mortgage – 4 Years

Mortgage Amount - $300,000

Current 4 Year Posted Rate – 4.74%

Discount – 2.45%

Penalty Fee

**=**(My Existing Rate – (4 Year Posted Rate - Discount))*(# of Years Left in Term)*Mortgage Amount

= (2.89% - (4.74%-2.45%))(4Years Left)*$300,000

= (2.89% - (2.29%))(4 Years Left)*$300,000

= (.6%)*(4Years Left)*$300,000

= $7200 Penalty

Bank just made an extra $7200 on your mortgage!

**5a. Real Interest Rate Paid after $7200 Penalty?**

If you broke your mortgage after 1 year and had to pay a $7200 penalty, your real interest rate would not be 2.89%. You would add an extra $7200/$300,000 or 2.4%.

Real Interest Paid (estimate) = 2.89% + $7200/$300,000 = 2.89% + 2.4% = 5.29%

**6. Mortgage Penalty after 2 Years, 3 years Left in Term**

My Existing Rate - 2.89%

Term Left on Mortgage – 3 Years

Mortgage Amount - $300,000

Current 3 Year Posted Rate – 3.85%

Discount – 2.45%

Magical Penalty Fee

**=**(My Existing Rate – (3 Year Posted Rate - Discount))*(# of Years Left in Term)*Mortgage Amount

= (2.89% - (3.85% - 2.45%))(3 Years Left)*$300,000

= (2.89% - (1.4%))(3 Years Left)*$300,000

= (1.49%)*(3 Years Left)*$300,000

= $13,410 Penalty

**6a. Real Interest Rate Paid after $13,410 Penalty?**

Real Interest Paid (estimate) = 2.89% + $13,410/$300,000/2 years = 2.89% + 2.23% = 5.12%

**7. Mortgage Break after 3 Year, 2 years Left in Term**

My Existing Rate - 2.89%

Term Left on Mortgage – 2 Years

Mortgage Amount - $300,000

Current 2 Year Posted Rate – 3.14%

Discount – 2.45%

Magical Penalty Fee

**=**(My Existing Rate – (2 Year Posted Rate - Discount))*(# of Years Left in Term)*Mortgage Amount

= (2.89% - (3.14% - 2.45%))(2 Years Left)*$300,000

= (2.89% - (.69%))(2 Years Left)*$300,000

= (2.2%)*(2 Years Left)*$300,000

= $13,200 Penalty

**7a. Real Interest Rate Paid after $13,200 Penalty?**

Real Interest Paid (estimate) = 2.89% + $13,200/$300,000/3 years = 2.89% + 1.46% = 4.35%

**8. Mortgage Break after 4 Year, 1 years Left in Term**

My Existing Rate - 2.89%

Term Left on Mortgage – 1 Years

Mortgage Amount - $300,000

Current 1 Year Posted Rate – 3.14%

Discount – 2.45%

Magical Penalty Fee

**=**(My Existing Rate – (1 Year Posted Rate - Discount))*(# of Years Left in Term)*Mortgage Amount

= (2.89% - (3.14% - 2.45%))(1 Years Left)*$300,000

= (2.89% - (.69%))(1 Years Left)*$300,000

= (2.2%)*(1 Years Left)*$300,000

= $6,600 Penalty

**8a. Real Interest Rate Paid after $6,600 Penalty?**

Real Interest Paid (estimate) = 2.89% + $6.600/$300,000/4 years = 2.89% + .55% = 3.44%

**9. This Sounds Crazy.**

I agree. Even most mortgage brokers are not aware of this. What is even worse if when you walk blindly into a bank and ask about break fees, they will have close to a zero clue how to calculate it.

Why?

If the calculation was out there, the gig would be up. If you google your banks penalty page webpage for detailed explanations of how it’s calculated, you will be blown away. They use interest rates of 6% to 9% for their case studies. I wonder why the bank doesn’t show an example with today’s current interest rates!!!!!!!!!!!!!! If they did, you would never ever get a fixed rate mortgage from that bank!

**10. What’s the solution?**

1. Get a smart mortgage broker (maybe me :) )

2. Don’t get fixed rate mortgages without knowing the exact calculation being used

3. Don’t walk blindly into banks

4. If your mortgage broker only talks to you about rates...run run run...

**Robert Klein Bio:**I had my first job when I was 4, I moved rocks for a neighbor for 1 cent a rock. By the time I was 8, I was in a partnership with my two sisters, aged 4 and 6 at the time. We ran the paper route racket business for 10 + years. At the age of 14 I discovered that the North Shore News would allow free advertising for kids. I put ads in saying “Experienced 14 year old can cut grass, clean houses, paint etc, $6/hour. Call 604 986 – xxxx.” By the end of grade 10, I was working over 40 hours a week during full time high school studies.

College and University was awesome, I ended up pursuing a degree in Science. More specifically, Wood Product Processing Science. Why you may ask? Simple answer: The Forest Science Building at UBC was a 5 star hotel. I couldn't say no, especially when you compared it to the other buildings at UBC at the time.

In 2008/2009 I invested into 17 properties with joint ventures, all properties owned under corporations in Winnipeg. At the same time, I became a mortgage broker.

The combination of insurance, investments, real estate investing, corporation (taxes) and mortgages has made my views a bit different than the main stream. It might explain why most of my clients are real estate investors and business owners.

I almost forgot, I partnered with a tech buddy of mine and we are building a newsletter platform called HippoContact.com.

Also, I married the women of my dreams in 2011. We lost touch for 8 years and found each other in 2010 on Facebook!

I also can't forget to give a shout out to my parents. If it wasn't for all of their guidance, you would not be reading this!

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