The Hidden Cost of Mortgages – Why Penalties Matter More Than You Think
Buying or refinancing a mortgage often starts with one question: What’s the rate? But the lowest rate doesn’t always mean the lowest cost. Behind many contracts lies a hidden trap — the penalty clause.
This week, I worked with clients who wanted to explore switching to a lower - rate mortgage. On the surface, it seemed like the smart move. Their current rate was about one percentage point higher than what’s available. But when we reviewed the details, the lender’s penalty calculation turned the “deal” upside down.
The cost to break early? Over $17,000. That completely erased any savings from switching. The result: staying in their higher-rate mortgage until early 2029 is the only sensible option.
Why penalties exist
Banks and lenders make their money from interest. When you break your contract early, they lose part of the revenue they were counting on. Penalties are designed to recover those lost dollars. But not all lenders calculate them the same way. Some are more borrower-friendly, while others maximize protection for the lender.
Common types of penalties
- Three months’ interest: Simple and predictable, but often used only for variable rates.
- Interest Rate Differential (IRD): Can be calculated in different ways. Some lenders use a discounted posted rate to inflate the penalty — leaving borrowers with shockingly high costs.
Why this matters
Flexibility matters. Life changes — jobs, moves, family needs. If your mortgage locks you in too tightly, it can cost you dearly.
True cost vs. sticker cost. The rate looks attractive, but if penalties are harsh, you could pay far more in the long run.
Informed decisions. Many borrowers don’t ask how penalties are calculated until it’s too late.
What to do before you sign
- Ask about penalties upfront. How does the lender calculate them? Are they based on posted rates or actual rates?
- Look beyond the rate. Consider prepayment options, portability, and flexibility.
- Run the numbers. A slightly higher rate with fair penalties can be cheaper than a rock-bottom rate with harsh terms.
The bottom line
Mortgages are not just about chasing the lowest rate. They are about building the lowest cost of borrowing over time. That means understanding not just the rate, but the fine print that dictates what happens if life changes.
We don’t chase the lowest rate. We build the lowest cost of borrowing. Support beats stress. Every time.
Book a call at www.mortgagecall.ca or email [email protected]