An argument for not getting your mortgage at a bank

[Globe and Mail – June 4, 2020]

A pandemic financial hardship story has revealed the expensive trap built into mortgages offered by big banks.

If you have to get out of a mortgage before it comes up for renewal, expect to pay a penalty to the lender. But penalties differ among lenders, with banks at the high end.

An Ontario real estate agent recently decided to put her house up for sale because her income had dropped as a result of the pandemic. As reported by CBC, her bank said it would cost almost $30,000 to break her mortgage.

As a general rule in mortgage lending, big banks have higher penalties to break a mortgage than alternative lenders you can access through a mortgage broker. Getting the lowest possible interest rate is a top priority in shopping for a mortgage. But breakage penalties must be considered as well, even if you think there’s zero chance of needing to get out of a mortgage suddenly.

The pandemic is an example of the kind of out-of-nowhere event that forces people to bail on a mortgage. This can happen even in good times – you get a job in another city, or become ill and need to move to change your living arrangements.

If you’re buying a home or renewing a mortgage, by all means ask your bank for its best offer. Then consult a mortgage broker to compare both the rate and the breakage penalty. Your bank may compete on rates, but the high breakage penalty is built in.

Expect to hear more stories in the months ahead from homeowners who have lost their jobs or income in the pandemic and have to sell their homes. Banks have allowed more than 721,000 people affected by the pandemic to defer or skip mortgage payments. When the deferrals end, some people may still be in a financial predicament that forces them to sell.

With surprising agility, the banks presented themselves early on in the pandemic as ready to help customers experiencing job or income loss. The goodwill the banks earned could quickly be undone by soaking financially distressed people who have to sell their homes. Offering some temporary easing of mortgage breakage penalties on a compassionate basis is the right thing to do.

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