Advice on breaking mortgage fee with RBC

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Advice on breaking mortgage fee with RBC

Sheldon Peart
Member since 2018 · 35 posts · 7 votes

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

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Julie Toh
Specialist · Mortgage Broker Canada · Member since 2015 · 316 posts · 118 votes
6y

@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.

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  • Patrick Archer
    Member since 2018 · 33 posts · 10 votes
    6y

    A mortgage broker may be able to shed some more light on this better than I can, but I’m assuming you have a fixed rate mortgage on the rental property since the fee is so high.

    In order to guarantee the fixed rate and prevent people from breaking and reapplying when rates go lower, fixed mortgages have a much more substantial penalty for breaking them.  

    A variable rate on the other hand is usually three months of the interest portion of your loan if you want to leave early (I’m guessing that’s what you have on your primary residence).

    In the future, I’d suggest always getting a variable rate on your investment properties IF you want the flexibility to sell anytime during the term with a relatively low penalty.

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    6y

    A variable rate mortgage, get a shorter term on the mortgage-do a 1-3 year if you are thinking of selling it.  Are you going to buy another rental?  You can always transfer your mortgage to another property.

    The penalty depends on where you are at in the mortgage.  While the two may have had a similar balance owing, if one was near the end of the term, the penalty would have been lower.  I just renewed one of mine today and was within the 150 days they set out, so there was no penalty (ie they waived it), but it was listed.  I think it was close to $900 and that would have normally renewed in Oct...so about 5 months.

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  • Jacob Perez
    Rental Property Investor · Hamilton, Ontario · Member since 2016 · 285 posts · 181 votes
    6y

    @Sheldon Peart - A basic rule of mortgages, is if you want a fixed rate product you do not take it at a major 5 bank as their penalties are literally triple the cost of the other mortgage lenders out there. Also variable rate mortgages penalties are even lower cost then that.

    At this point, you have 2 options, port your existing mortgage so you avoid the penalty but then you are stuck keeping your existing rate or, bit the bullet, take the penalty from your proceeds and work with a mortgage broker to avoid this situation in the future.

    For a more detailed analysis feel free to DM & I can help.

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  • Sheldon Peart
    OP
    Member since 2018 · 35 posts · 7 votes
    6y

    Thanks alot guys, i really appreciate the input and advice. Our primary is a fixed rate also, which is why i found it confusing, but it has a slightly lower rate and it is not with RBC, that is with First National and i now know the big 5 do not have favorable terms. Unfortunately we do not have another property to port the mortgage to right away. Going forward we will go with other lenders like First National for future properties and will ensure we can break mortgages for much lower costs. We will be deciding this week if we bite the bullet or just hold till term and chalk this up as a learning curve.

    Thanks again,

    Sheldon

    0Reply
  • Julie Toh
    Specialist · Mortgage Broker Canada · Member since 2015 · 316 posts · 118 votes
    6y

    @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.

    1Reply
  • Roger Peng
    Member since 2019 · 8 posts · 2 votes
    5y

    if I want to port my mortgage to another property how much of a time frame do I have to purchase the other property, does it have to be at the same time as the sell of the first property?

    0Reply
  • Account Closed
    Member since 2019 · 1k+ posts · 1k+ votes
    5y

    @Sheldon Peart

    Next time go variable. Historically it has won out over fixed. Occasionally, lenders can be convinced to cover the fee when you’re switching from on to another. Although it is MUCH easier to convince them when it’s 3 months interest (variable) penalty.

    1Reply
  • Sheldon Peart
    OP
    Member since 2018 · 35 posts · 7 votes
    5y

    Yeah i hear ya, this has been a learning curve on setting up mortgages for sure. We have looked at the variable previously but have always avoided it because we thought it was more probable that they move upwards than downwards going forward, which was true before Covid, but its a different interest rate world at the moment. It is hard to believe they will move lower than current rates..... but i also said that 3 years ago when we signed structured the mortgages. 


    Thanks for the advice

    Sheldon 

    0Reply
  • Julie Toh
    Specialist · Mortgage Broker Canada · Member since 2015 · 316 posts · 118 votes
    5y

    @Roger Peng Your current mortgage lender can provide you this info. Some lenders only allow 30-120 days for you to finishing porting. 

    0Reply
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