How big can penalties be?

Often the penalty of a fixed rate mortgage will be the best reason to select a variable rate mortgage. Some penalties on fixed rate mortgages can be HUGE depending on the lender and the product that you sign up for.

The highest one i have seen a client quoted in 2021 was $37k.... yup, $37k to break a mortgage they paid on time every month that their bank put them in and told them it was the "least risky" mortgage (a 5 year fixed). These people were selling their home and needed a new mortgage but no longer qualified with their current lender due to a job change. So the bank would not port their mortgage. They were forced to break the mortgage hand over $37k to the bank in the process.

Typically you will see higher penalties on any fixed rate product where the lender uses a posted rate to calculate their Interest Rate Differential (IRD) penalty. This is the penalty you trigger when you break your mortgage part way through the term that you signed up for.

For these penalties alone one would argue that a variable rate mortgage that only has a 3 months interest penalty should be the one labelled "least risky" mortgage in Canada.

To give you an idea of what these penalties might look like if we are comparing apples to apples.... we had a property we sold and did not have another property to port the mortgage to. The balance was about $300k left on the mortgage. The penalty I had to pay on my 5 year fixed mortgage was $18k.... $18k.... on a house that $15k was my whole down payment when I bought it! Yes, we had to give more in a penalty to my bank than what we had originally saved to buy the house in the first place. for nothing. Really, it was because we were young and didn't plan for the "what ifs" and didn't really read the fine print in our mortgage contract at all (clearly this was before I did this for a living). Anyways.... if this mortgage had been with a lender who did not use a posted rate in their IRD penalty this cost to break our mortgage would have been $2500. Lastly, if it had been in a variable rate mortgage it would have been less than $1500.

What is the moral of the story? Read the fine print of your mortgage contract.... or be working with someone who will read if for you like me!