• WHAT IS AN IRD AND HOW CAN IT AFFECT YOU?

  • When it comes to mortgages, many of us get frustrated trying to figure out the penalties to get out of our mortgages before the current term expires – this might be due to a refinance (debt consolidation, equity take-out for reno’s, etc) or because we are moving and don’t have a mortgage that moves with us. There are numerous reasons why someone might not finish the term on their mortgage – but there are not numerous solutions to the problem!
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    IRD (Interest Rate Differential) charges compensate a lender for lost interest when you prepay large portions of a closed (fixed) mortgage early. This charge is basically the difference between the interest you promised to pay and what the lender can earn if you were to take that mortgage out today.

    IRD or penalty charges are historically hidden behind cryptic language that the lender uses to disguise just how expensive it can be and thus can act as a deterrent for people to cancel their current mortgages.

    But things are a changing! The government or more clearly, the Dept. of Finance has instructed the banks to be more opaque and thus they must now give clear explanations of prepayment charge calculations and provide website calculators so that we can figure out our own prepayment penalties or IRD charges.

    This is a huge win for mortgage consumers. But there is still one catch! In order to calculate what your IRD is, you must know what the initial discount you received at the time you got your mortgage. If you don’t have this piece of the puzzle, you cannot complete the calculation – so what does this mean? It means you need to visit your bank and be persuaded to keep your current mortgage, refinance for a better rate with them and so on, so on! It is a ploy to keep your business so that you don’t leave and go to another lender.

    Another problem is that few non-bank lenders (available through mortgage agents/brokers) have taken the initiative to create online penalty calculators. That makes comparing penalties between banks and non-bank lenders unnecessarily difficult, which incidentally plays right into the big banks’ hands.

    So how do you protect yourself, if you are not with a bank but with a lender obtained through a mortgage agent/broker? If you want a five-year fixed term, have your mortgage agent/broker estimate that lender’s penalty as if you planned to break the mortgage after 3.5 years (the average break time), assuming rates stay the same. Then ask the adviser to give you a sense for how this penalty would compare to the bank. Knowing the math before will give you a sense of what you can afford if that were to happen. Remember, it pays to estimate mortgage breakage costs in advance and avoid surprises later. Your mortgage agent/broker will be happy to do this for you as it also helps then retain your loyalty and your business.

    What can you do if you need to break your mortgage after 3 or 4 years in a 5 year term (just an example – could be any term)? You can use a service called Payless Penalty (http://www.paylesspenalty.com/index.php?plugin=wafp&controller=links&action=redirect&l=&a=mortgage_maven ).

    Payless Penalty simply takes advantage of your mortgage prepayment privileges to reduce the amount of the payout penalty you would have to pay. Using their resources and capital, Payless Penalty pays down your mortgage by the maximum pre-payment privilege allowed. This lump sum payment reduces your mortgage thereby reducing the amount of your payout penalty.
    See how it works by viewing this video here: http://www.paylesspenalty.com/faq/

    Having relevant tips and strategies when it comes to IRD charges can save you the borrower thousands of dollars. Remember to protect yourself and your pocket book by doing advance calculations so when it comes time to cancel early, you are not left holding the bag! But if it does come to that point, don’t stress, speak to a knowledgeable mortgage agent/broker, and take advantage of services like Payless Penalty – which in the end can make the difference between getting out of your mortgage or having to endure your mortgage because the penalties are so prohibitive.

    To your Wealth!
    Amina

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