Interest penalties

Interest penalties between a big bank and a mortgage only lender. There is a huge difference as the calculations are much different.

Remember, it's not always about rate. That number you see is not the deciding factor. It should be what's behind that rate and what commitment your broker will give you to manage your mortgage for the foreseeable future.

Here's an email conversation used for one client comparing the penalty between RBC and MCAP, a lender we use.

RBC takes your “discount” off their original posted rate and compares it to the term remaining to calculate a penalty.  Therefore, if you got 3.09% with RBC today, that would be a 2.15% discount off their posted 5 year rate.  If we assume rates are the same as today in 3 years when you pay your mortgage off, they take the 2 year posted rate and deduct your 2.15% discount.  Today’s 2 year posted rate is 3.35%.   Leaving you a  1.20% comparison rate to your 3.09% contract rate.  That’s a difference of 1.89% to calculate an IRD.  The bigger this number (or spread) the bigger your penalty.  That’s a bad thing.

What MCAP does is take your contract rate, and compare it to their current contract best rate for a comparable term.  In the same scenario as above, they’d compare your 3.09% contract rate to their 2 year rate of 2.79%.  That’s only a spread of .30%, meaning IRD wouldn’t apply.  Only a 3 month interest penalty would occur.

For real numbers on your mortgage, assuming you owed $230,000 it could end out like this using the above scenario:

RBC penalty: almost $7,871

MCAP penalty: $1,776

That’s a $6,095 difference.  I’m not saying you will ever need to pay your mortgage off, but it’s nice knowing that if you did, the numbers would be reflective to your benefit if the situation did occur. 

What I’m saying – isn’t it great to get a great interest rate, but also a great mortgage!?

Here’s some calculators.  Info on how each institution calculates their IRD penalties are available on these sites as well. Of course the RBC one is a bit harder to plug in the right numbers as you'd need to know what your discounted rate was.

Here’s the link to the MCAP payment calculator.

Here isthe link to the RBC payment calculator.