“Mortgage penalty can be a shocker,” stated Ellen Roseman in her blog, On Your Side. She reminds readers that the interest rate differential (IRD) prepayment penalty charged by lenders to borrowers who break their terms early can amount to thousands of dollars.
One broker commented that this penalty amounted to $28,000 for his client whose mortgage totaled $500,000.
The blended mortgage is one way to gain needed financing without having to break your current mortgage. With blended financing, the new amount borrowed is fused to your current mortgage loan, giving you a blended interest rate and saving you from shelling out any penalty fees.
When a Blended Mortgage is not so Ideal
Depending on what the marketplace is doing when you require additional financing, a blended mortgage may not grant you the best rate possible. Say your current mortgage term has two years left at a rate of 7.5 per cent and you require a new loan of $20,000. The 5 year fixed rate available today has dropped to 3.6 per cent. If you broke your loan now, you could refinance to this much lower rate and gain the extra sum you require. The savings you will amass from a lower rate could outweigh the penalty.
Confused about what that penalty might be? So are many mortgagees. For this reason Canada Mortgage Trends has installed a Mortgage Penalty Calculator on their site to give Canadians an approximate idea of what that penalty will look like.
If your current mortgage term is set a rate that is still competitive today, thwarting a penalty and keeping your current contract could be of significant benefit – especially if you find yourself requiring funds when rates have risen. If you are looking for additional financing, be it for a major renovation or a down payment on a property abroad, discuss the blended mortgage option with your mortgage broker.