You are preparing to purchase your new home! That is fantastic, exciting news! As excited as you and your family are, this home is a transition into the next home and more than likely you are planning on selling in the next 5 years to upgrade or move to another city. That’s all good, however, there are some things you will want to consider and think about to determine what type of mortgage will be best for you and your family. As you look for the best mortgage broker to help you through this process, they should ask you questions to help you determine what loan will be best for you. Hopefully they will guide you towards the right path.
My take on this is that if you are planning to sell your home within five years, you may want to reconsider a fixed term mortgage. Why, you may ask? Well, for one, the penalties associated with selling your home before your fixed term is up are fairly substantial. The penalty for breaking your mortgage term, whether it be selling or refinancing, with a five year term is known as IRD, or Interest Rate Differential. This IRD is calculated differently with each bank and is not a friendly calculation.
To give you an example, one bank could charge a $5,000 IRD penalty on a $300,000 mortgage and another bank could charge a $10,000 penalty. That’s how large the difference can be between lenders.
This calculation is typically complicated and unfortunately you will not know what it is until you are ready to sell your home and the bank prints off the amount that is in their system which is an automatic calculation. The calculation of this penalty has so many variables, depending on what the current rates are at the time you sell, how far you are into your mortgage as well as what your rate was when you originally got the loan. So, in saying this, a lot of times it changes the further you get into the mortgage and should do down, however, this is not always the case.
There are also “Low Rate Basic Mortgages”. With these types of mortgages you get a lower rate than normal. Anytime during your term if you decide to sell or refinance and you don’t get a mortgage with the bank that held your original note, you will be charged 3% on the balance of the mortgage.
The only combat against paying these types of penalties is to take a variable rate where you only pay a three month interest penalty at any point you break the mortgage. For example, with a $300,000 mortgage, 2.4% rate, 5 year term, and 25 year amortization, you will be paying between $500-580 per month in interest. This would mean that your penalty would be $500 x 3 months for a total of $1,500 or $580 x 3 months for a total of $1,740. This is a far less penalty than if you had taken a fixed rate mortgage.
To simplify the whole mortgage process, read the Kelowna Mortgage Broker tips.