Advice on breaking mortgage fee with RBC

[Sheldon Peart]

I am looking for a bit of advice regarding selling a property and the breakage fees associated.

We are looking to sell one of our properties that has a mortgage with RBC and we recently called to see what the cost is when we sell. We were very surprised at the cost $8100 for a 300K property, with about 25% equity in. The reason i found this surprising is because we are looking to pay off our primary mortgage and the fee was only $1600 with approximately the same out standing balance. The difference between these two is substantial. We are now contemplating if we should just keep it rented until term (basically 3 years to go)

My question is: Is there a way to avoid this breakage fee in the future? Is there some type of mortgage clause we want to have when we purchase future properties? Would the only way to avoid this be to keep the property until mortgage term is up? It seems odd to me that would be the case. Maybe there are lenders that offer a much more reasonable breakage fee, if so, please let me know who they are.

Thanks for any advice/insight into this issue.

Sheldon

[Julie Toh]

@Sheldon Peart Two key things I'd explain to a client when i arrange their first mortgage are : fixed vs. variable rate and mainstream vs. wholesale banks. 

Fixed or variable rate? This is an age old debate. Consider these startling facts: 

1. Six out of ten mortgages are broken at an average of 38 months in. People plan to stay in their home for the full five years of the mortgage and beyond, but then things change. Things happen, both good and bad. Divorce, marriage, kids arriving, kids departing, job transfers & promotions, an offer on the property that you cannot refuse… and now you want out of the mortgage. The trouble is, depending on which institution the 5 year mortgage is with, the pre-payment penalties can be as high as 4.5 per cent of the balance. ($4,500.00 per $100,000 of mortgage balance)

2. It costs nine times more to get out of a five-year fixed (bank) mortgage than a two-year fixed or a variable. Typically the prepayment penalty for the shorter term or variable is about 0.5 per cent on the balance (just $500.00 per 100,000 of mortgage balance). And the term on a two-year might even be short enough to wait out, avoiding any penalties at all.

The five-year fixed mortgage can be a safe-ish way to go, but it needs to be placed with the right lender, one with flexible prepayment penalty policies and flexible early renewal policies.

There is much more than just the rate itself to review when getting a mortgage.