A good fixed rate as well as a minimal penalty option?

Corine approached us after she had an accepted offer on an Ottawa house and 2 banks had already pre-approved her for a mortgage, securing her an excellent 5-year fixed-rate. She had heard about us in the past and called just to make sure she is not missing anything in her process.

Unfortunately, Corine’s call came after most banks and lenders had already raised their mortgage rates. We figured we had missed out on the opportunity to help her. It was frustrating to discover that at the time the bank secured her a fixed rate of 2.79%, we could have gotten her a much lower rate. Since then the rates went up, but luckily for her, she had a good rate hold with the 2 banks.

It’s not only about the rate

What started as a phone call to get a second opinion quickly turned into an opportunity to give the client some real value. During the conversation, we learned that in 3-4 years Corine plans to grow her family and upgrade her house to a bigger one. The immediate implication was that going for a 5-year fixed-rate with one of the banks will turn into a very expensive mistake. On top of that Corine shared with us additional financial information that directed us to special mortgage products that have very competitive rates.

From that point our focus shifted and instead of looking at the small differences between the rates offered, we focused on penalty costs when breaking the mortgage. A simple calculation showed that, with the banks, Corine’s penalty would be $32,000 while we could decrease it to $4000 and keep the best terms and a good enough rate.

What’s better; transfer a mortgage or break it and pay the penalty?

According to financial data published last week, 72% of Canadian mortgage holders break their contract midterm and pay penalties. Therefore, the penalty is the main component that increases the actual cost of the mortgage, and it is much more influential than the rate. Apparently, most borrowers prefer not to port or transfer a current mortgage to the new house. Porting a mortgage will usually happen when the borrower has taken a fixed-rate mortgage with a federal bank. Those usually come with a high and binding penalty. In other cases, clients prefer to break the contract and pay a low penalty. Their math is simple, they save money.

I would like to share that in all our years of experience as mortgage experts we only ever encountered one instance where the preferred option was to port a current mortgage and add more funds on top of it. In all other cases our clients saved more money by breaking the contract, they paid the penalty and moved to a larger and better mortgage. The flexibility to choose the timing and break the contract for a cheap cost was the outcome of laying good foundations with the first mortgage. We initially structured the right mortgage to break when the time comes. In the last few years, banks’ fixed-rate mortgages have become highly attractive. Unfortunately, they came with a high price tag in the shape of a huge penalty. Therefore, we started exploring quality financial institutions that offer an excellent combination of low fixed rates with a very low penalty option.

Does a fixed-rate mortgage with the lowest penalty option exist at all? Yes!

A few days later we got Corine an approval. Luckily there was no need to compromise on the rate. We managed to match the 2.79% and secure her the lowest penalty option in the market, but our efforts did not stop there.

In 3 days, we took advantage of a surprising promo and got to lower her rate to 2.74%. One day later we took it down to 2.69%.

At Sneg Mortgage Team, we lead an on-going and proactive process of improving our client’s rates. We aim to use any opportunity that presents itself to lower the rate for our clients. We are aware that the banks will not initiate such a thing for their clients, as they will lose money. Today I shared the good news with Corine. We are proud to have a happy family start their financial path with the best mortgage possible, combining the best-fixed rate in the market with the lowest penalty option.
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