PENALTIES AND PORTING
If a mortgage term needs to be broken then there are 2 options;
1) port the mortgage to a new home or,
2) incur a breakage penalty.
How are penalties calculated?
1) If you have a standard variable mortgage, typically the highest penalty that can be charged is 3 months interest.
2) If you have a standard fixed rate mortgage, it is typically the higher of:
a) 3 months interest or;
b) Interest Rate Differential (IRD)
IRD penalties calculate the difference between your contract rate and today's rate as well as the time you have left on your contract. IRD penalties can be substantial.
How the IRD is Calculated
(links to a Revenue Canada webpage)
What is Porting?
Porting is an option to move your existing mortgage (balance, term, amortization remaining...) to a new home. Because it is just being moved, the client does not incur a penalty. There is a time limit to port and the rules vary lender to lender. Porting DOES require requalifying.
NOTE: Typically only fixed rate mortgages can be ported.
So why doesn't everyone just port?
1) Because under the majority of programs, the amortization must stay the same as the mortgage being ported. So if you want to port a mortgage that only has 15years left on the amortization - the new homes amortization will also have to be 15years (instead of a new 25yr amortization). This can make for a higher payment on the new home (if upgrade) and therefore may make it more difficult to qualify.
2) If the client is concerned over rates rising and elects to break it so can go into a longer term.
3) If the lenders rules to port cannot be met. Ex: time between closings goes over the allowable time frame. You cannot port into a draw construction mortgage.
Why is there a penalty? If I don't want to port, I will come back to the same lender, isn't that enough?
Sorry but no. Fair is fair. I know if I were in a 5yr fixed and the lender called and said they were increasing my rate, my next call would be to a lawyer. It goes both ways, it is a legally binding contract.
Is there anything else I need to know about IRD penalties?
Lenders also have 2 ways of calculating the IRD penalty. One way, the client pays more; the other, the client pays less.
Are there any other charges I should be aware of?
All lenders charge approx. $300 as a discharge fee (sometimes a.k.a. a transfer fee or re-investment fee...) to cover their administration/costs involved.