How Mortgage Penalties are Calculated

When you’re shopping for a mortgage, what’s the most important thing? Most Canadians will say getting the lowest mortgage rate. While getting a low mortgage rate certainly matters, it’s important to recognize that there are other things to consider as well.

There’s a difference between getting the lowest mortgage rate and the lowest cost of borrowing. Getting the lowest mortgage rate is just that, the mortgage with the lowest rate. Whereas, getting the lowest cost of borrowing factors in other things like prepayments and penalties. In this week’s article, we’re going to talk about the latter, penalties.

When you sign up for a mortgage, probably the last thing on your mind is breaking it. But sometimes life happens and you’re forced to break it sooner than anticipated. It could be for many reasons: relocating for a job promotion, job loss, divorce, and the list goes on. If you didn’t take the time to ask about mortgage penalties when you first signed up for your mortgage, you could find yourself blindsided by a big penalty.

In this article, we’ll look at how mortgage penalties are calculated for variable-rate and fixed-rate mortgages. After reading this article, you’ll have a much better understanding of how mortgage penalties work and what to look for.

“Roughly 2 out of 3 people break their mortgage early, at an average of 33 months”

Dustan Woodhouse

Dustan Woodhouse President at Mortgage Architects

Variable Rate Mortgage Penalties

If you’re signed up for a variable (or adjustable) rate mortgage, the penalty is pretty simple. You’ll pay three months’ interest for breaking your mortgage early. This is the most favourable mortgage penalty calculation (besides paying no penalty at all of course). Whether you’re with one of the big banks or a monoline lender, your penalty will be three months’ interest.

For example, let’s say your mortgage rate is 2.49% percent and you have a $500,000 mortgage balance. In this case your mortgage penalty would be:

2.49% × $500,000 × (3 months/12 months) = $3,113

Pretty simply wouldn’t you say? Whether you break one month into your mortgage over four years, three months in, your mortgage penalty is the same.

Fixed Rate Mortgage Penalties

If you sign for a fixed rate mortgage like most Canadians, the mortgage penalty calculation is a little more complicated. You’ll pay the greater of three months’ interest or something called the “Interest Rate Differential” or IRD for short. If you’ve read stories in the media about Canadians paying huge mortgage penalties, the IRD is most likely the reason why.

Using the same numbers as above, even though your mortgage rate is only 2.49%, if you’re with one of the big banks whose posted rate is let’s 4.79%, that’s when it can really inflate your penalty.

Let’s say you have three years left on your mortgage and your lender’s three-year fixed mortgage rate is 2.25%. If we use the IRD, your mortgage penalty would be:

$500,000 × 36 months × 2.54% (difference between 4.79% and 2.25%)/12 months = $38,100

Because the IRD penalty calculation is greater than the three months’ interest calculation, you’d have to pay a penalty of almost $40k to break your mortgage early. I don’t know about you, but that’s a lot of dough!

The example we showed here is using one version of IRD known as Standard IRD which is based on the current posted rate for a similar comparable term. There are many other versions of IRD and penalty calculations. Some Lenders calculate their penalties on the posted rate at the time you got your mortgage, some deduct the discount you originally received of the posted rate, some require you to pay back the cash-back you originally received, some calculate penalties entirely differently, like 12 months interest or 3% of balance. The only true way to find your exactly penalty is asking your lender. 

The Bottom Line

It’s important to ask about mortgage penalties up front so you’re not forced to pay a penalty out of pocket like this later on.

If you want a fixed rate mortgage, but don’t want to get stuck paying a huge penalty out of pocket, you may consider taking out a fixed rate mortgage with a monoline lender instead of the big banks. Monoline lenders don’t have high posted rates like the big banks, so your mortgage penalty is likely to be a lot lower when breaking your mortgage with a monoline.

Weekly Market Report

The showing activity across the Province climbed slightly week over week. The showing activity continues to be well above this time period last year, currently sitting at 130.6% more showings compared to last year.
The showing activity for CIR’s listings also experienced a slight uptick week over week, with 1,995 showings. The majority of the activity remains to be in the mid points of the markets with a slight decline in the lower price points. The showing activity of weeks passed continues to translate into sales as CIR’s transactions are up 31.4% in the first two weeks of the month compared to the first two weeks of September 2019.
The property ladder has been in full motion over the past three and a half months. With the uptick in the lower price points, it has freed up buyers that had homes they needed to sell to make their next purchase. We have seen the sales volume climb upwards on the price scale as a result.  We do anticipate to see slower activity as we enter into the late Fall, and early Winter months as we do each year but as of right now, the lower inventory combined with heightened sales continues to help balance many markets.

-CIR Realty

How to “hail-proof” your roof before Calgary’s next big storm

Calgarians have had more than their share of weather challenges this summer, including several nasty bouts of hail. Thankfully, a little preparation can help your home’s roof emerge unscathed the next time golf-ball-sized ice chunks starts falling from the sky.

“Hail eats standard laminate architectural shingles like sugar eats kids’ teeth,” said Anthony Babin, owner of A.B’s Roofing & Contracting. “The best protection is found in metal, rubber and tile roofs, followed by those with Class 3 or Class 4 high-impact-resistant shingles.”

Of course, protection comes at a cost. While standard shingles will run a homeowner around $2.30 – $3.50 per square foot, depending on the contractor, impact-resistant shingles range from $3.50 – $5.00 per square foot. Rubber, metal and tile come in at $5.00 – $8.00 per square foot.

Fortunately, most roofs are built to last, so that upfront cost can be a solid investment.

“The average lifespan for standard architectural shingles is 15 – 25 years, and the majority come with a limited lifetime warranty,” said Babin. “While warranties for other material like rubber, metal and tile differ among manufacturers, they generally range from 25 – 50 years.”

“HAIL EATS STANDARD LAMINATE ARCHITECTURAL SHINGLES LIKE SUGAR EATS KIDS’ TEETH.” – ANTHONY BABIN, A.B’S ROOFING & CONTRACTING

The choice of material will also impact ease of installation. All asphalt shingles are fairly easy to install, as is rubber, while metal can be more technical.

“With asphalt, you put underlay on and install the shingles right over top, but metal requires a different underlay and strapping on the roof deck,” said Babin “This allows you to elevate the roof and still have the ability for air to transfer through the space, avoiding issues with mould or condensation. Tile roofs can equal metal in terms of complexity, depending on the design.”

Apart from choosing the right roofing material, the key to proper protection during the next hailstorm comes down to general maintenance.

“So many homes are way past due for maintenance, so the biggest thing I stress is being proactive with your property,” said Babin. “We see the most problems with older homes, and often with rental properties where the owner may be trying to squeeze every dollar they can from the property without doing maintenance.”

Homeowners are encouraged to regularly inspect their property and have a roofer or contractor with verified credentials examine their roof if they believe there might be an issue.

“Spring is a good time to look at your roof, as it has just gone through the freeze/thaw cycle that can cause a lot of damage to shingles.”

As with any house-related project, owners should do their homework before hiring a professional.

“Check references on a contractor and ask to see their portfolio, then check that they have general liability insurance and WCB coverage,” said Babin. “At the end of the day, this will ensure that the work is done properly and at a reasonable price.”

-CREB Now

August home sales consistent, but COVID-19 impacts continue

City of Calgary, September 1, 2020 –

Total residential sales in August were relatively stable compared to last year with year-over-year gains in the detached and row sectors.

These gains offset declines in the apartment and semi-detached products.

With 1,573 sales in August, this is consistent with levels over the past five years. Year-to-date sales activity remains nearly 13 per cent below last year.

“Recent national reports have shown a bounce back to new record levels over the past several months. Calgary has seen improvements over the lows recorded during the lockdowns but is far from record levels,” said CREB® chief economist Ann-Marie Lurie.

“The situation in Calgary has been slightly different as the job losses were not isolated to sectors that are typically associated with rental demand. We have started to see improvements in the job market compared to previous months as some jobs start to return.”

However, the impact of COVID-19 on the economy is not over.

“There have been more than 100,000 jobs lost since last year and Calgary’s unemployment rate sits at 15 per cent. This is well above the national average of 11 per cent,” said Lurie.

New listings are easing and is helping to chip away at existing inventory compared to the higher levels recorded last year. However, the pace of year-over-year decline has eased as inventory levels have trended up relative to levels recorded a few months ago.

The months of supply has also risen compared to the past few months and now sits at four months. This gain has slowed some of the monthly gains on prices. The residential benchmark price in August was $420,800 and is nearly one per cent lower than last years’ levels.

-CREB

 

Q2 2020 Quarterly Update

The second quarter of 2020 marked the first full quarter since COVID-19 began to weigh on the economy.

Calgary housing sales slowed by 35 per cent compared to the previous year. This is better than original expectations, thanks to June figures that were far stronger than initial estimates. The pullback in new listings in the second quarter caused inventories to trend down, preventing a more significant decline in prices.

The second quarter benchmark price trended down compared to the first quarter and eased by 2.3 per cent compared to last year, just slightly above initial forecasted levels.

“Unquestionably, COVID-19 will continue to impact the housing market over the next several quarters. However, the extent of the impact may not be as severe as estimates from three months ago,” said CREB® chief economist Ann-Marie Lurie.

“While the situation may look brighter than it did a few months ago, it is also important to note that challenges remain.”

Overall, we continue to expect citywide benchmark home prices to ease by nearly three per cent this year and sales activity will remain weak compared to the already low levels recorded last year.

Despite the wide range of expectations on home prices, we do not expect a stronger price decline in 2020 for a couple reasons:

  • Adjustment in supply. Demand has fallen, but so have new listings and inventory levels. This is preventing significant gains in the months of supply and slowing the downward price pressure.
  • Support provided by lenders and government is expected to cushion the blow from COVID-19, preventing a more significant price drop this year.

As we move into the second half of this year and into 2021, there remains significant downside risk. If jobs do not return as anticipated and the support from lenders and government ends, we could start to see a rise in supply relative to demand. This may cause stronger price declines in the market entering 2021.

-CREB

For more information, please download CREB®’s Q2 2020 Calgary & Region Quarterly Update Report.

Sales decline by two per cent from last year amidst COVID-19 pandemic

After three months where COVID-19 weighed heavily on the housing market, sales activity in June continued to trend up from the previous month, totalling 1,747 units.

Caution remains necessary, as monthly sales are nearly two per cent lower than activity recorded last year. However, this represents a significant improvement compared to the past several months, where year-over-year declines exceeded 40 per cent.

“Recent price declines, easing mortgage rates and early easing of social restrictions are likely contributing to the better-than-expected sales this month,” said CREB® chief economist Ann-Marie Lurie.

“However, the market remains far from normal. Challenges, such as double-digit unemployment rates, will continue to weigh on the market for months to come.”

New listings in June totalled 3,335 units, a six per cent increase over last year. The recent rise in new listings caused inventories to trend up, but they remain well below last year’s levels.

Despite some recent monthly gains in supply, sales activity was high enough to cause the months of supply to dip below four months for the first time since May 2019. If this trend continues, it should help to ease the downward pressure on prices.

Residential benchmark prices are comparable to last month, but they remain nearly three per cent lower than last year’s levels.

 

HOUSING MARKET FACTS

Detached

  • Sales activity in June totalled 1,092 units. This is an improvement over the past few months and only slightly lower than last year’s levels.
  • Despite citywide declines, year-over-year sales activity improved in the City Centre, North East, North, South East and East districts.
  • June also saw an increase in new listings, which is causing some monthly gains in inventory. However, increased sales offset the rise in new listings, causing the months of supply to trend toward more balanced conditions.
  • Detached benchmark prices remained relatively stable compared to last month but were two per cent lower than last year’s levels. Year-over-year price declines were recorded across most districts, with the largest declines in the North West, North East and City Centre districts.

Apartment

  • Apartment sales totalled 227 units in June. This is an improvement from the 136 units last month, but it is still nearly 13 per cent lower than last year’s levels and over 30 per cent lower than longer-term averages.
  • New listings rose compared to last month and last year. This did translate into some monthly inventory gains, but overall inventory levels remain lower than last year’s levels.
  • The months of supply has come down from the high levels recorded over the past few months.
  • Benchmark prices continued to trend down this month, totalling $240,900. This is a year-over-year decline of nearly four per cent.
  • The resale apartment sector continues to be one of the hardest hit in terms of relative declines in both sales and prices.

Attached

  • The attached sector has faced the smallest impact from the pandemic. June sales were nearly three per cent higher than last year’s levels and remain comparable to longer-term averages. The attached sector has generally benefited from its status as a more affordable alternative to the detached sector.
  • Like the detached sector, the attached sector saw new listings rise compared to both last year and last month. However, the months of supply trended toward more balanced conditions and improved over last year’s levels.
  • Benchmark prices remained relatively stable compared to the previous month, but fell by nearly four per cent compared to last year. The higher price decline in this sector could be a contributing factor to the improving sales activity.

 

REGIONAL MARKET FACTS

Airdrie

  • Following declines over the past three months, June sales rose above last year’s levels. While the monthly gain was significant, it was not enough to offset previous pullback, as year-to-date sales remained nearly eight per cent below last year’s levels.
  • Airdrie also saw new listings rise, but inventory levels remain well below last year’s levels. The months of supply dropped below three months and is lower than pre-COVID-19 levels. If the supply/demand balance stays in this range, we could start to see some of the downward price pressure ease.
  • Airdrie’s benchmark price was $327,400 in June. This is down compared to the previous month and over two per cent lower than last year’s levels. Year-to-date prices remain just below last year’s levels.

Cochrane

  • Sales in Cochrane this month improved over last year’s levels. At the same time new listings also rose, causing some growth in inventory levels. However, the improvement in sales outpaced the gains in inventory, causing the months of supply to trend down.
  • Supply/demand balances are improving, but it takes time before this is reflected in prices.   In June, the benchmark price was $394,900. This is slightly lower than last month and nearly four per cent lower than last year. It will likely take several more months of more balanced conditions before seeing any impact on home prices.

Okotoks

  • June sales remained relatively stable compared to last year’s levels. However, with steep declines in April and May, year-to-date sales remain well below both last year’s levels and longer-term trends.
  • Recent gains in new listings caused some monthly gains in inventory levels. The monthly gain in inventory was not enough to offset the monthly increase in sales, causing the months of supply to trend down to three months in June.
  • Benchmark prices were falling prior to the COVID-19 pandemic, but the pace of decline increased during the past several months. In June, benchmark prices remained relatively stable compared to last month, but they remain over four per cent lower than last year’s levels.

-CREB

Weekly Showing Report

The month of May brought with it consistently increasing showing activity across the Province.  In the past week, the showing activity has risen to within 12.7% of the showings we experienced during the same time period last year.
The showing activity for CIR’s listings also experienced increased activity in May, ending the month with over 5,673 showings which was an increase of 3,384 showings over April. The activity has tapered off in the last week of the month ending our 7 week streak of increased showing activity week over week. We anticipate showing activity to remain fairly consistent in the coming weeks as the Province continues to open back up.
-CIR Realty
Weekly showing report June 5
Showing Time June 5

Media release: COVID-19’s impact on Calgary housing market continues

Housing market activity in May remained slow, but sales exceeded the lows from April, which saw less than 600 sales in Calgary.

May sales totalled 1,080 units, a 44 per cent decline from last year’s figures.

“The initial shock of COVID-19 and social distancing measure is starting to ease. This is bringing some buyers and sellers back to the market. However, this market continues to remain far from normal and prices are trending down,” said CREB® chief economist Ann-Marie Lurie.

“Activity has also shifted toward more affordable product, which is likely causing differing trends depending on product type and price range.”

Sales are down in all price ranges, but a greater share of sales are priced below $500,000.

In the higher price ranges the drop in inventory has not been enough compared to the drop in sales. Additionally, the months of supply is far higher than the already elevated levels seen during the past five years.

The shift in sales toward lower-priced product is contributing to steep average price declines in the Calgary market.

Benchmark pricing, which reflects comparisons of the same type of home, has eased by over two per cent compared to last year and 0.4 per cent compared to last month. This does not come as a surprise as the market continues to struggle with more supply than demand.

COVID-19 and social distancing measures have contributed to rising unemployment rates and job losses throughout many economic sectors. This is weighing on consumer confidence and the housing market. Some of this job loss is temporary, but the energy sector remains the largest concern.

Significant job loss throughout the typically higher-paid professional and technical services sector points to a longer adjustment period in the housing market, particularly in the higher end of the market.

 

HOUSING MARKET FACTS

Detached

  • Detached sales eased across the city, with the largest declines occurring in the West district.
  • May sales totalled 670 units. This is a 43 per cent decline over the previous year.
  • The decline was met with lower inventory levels. However, it was not enough to change the oversupply situation. Citywide months of supply remained above four months.
  • For the higher-priced districts – the West and City Centre – the months of supply rose to seven months.
  • Detached home prices trended down in May compared to the previous month and remained nearly two per cent below last year’s levels. Declines varied across the city, with the highest price declines occurring in the City Centre, West, North West and North East districts.

Apartment

  • Apartment sales totalled 137 units in May, an improvement from the 95 units last month. However, this is still nearly 60 per cent below last year’s levels. The pullback in inventory was not enough to offset the slower sales, and the months of supply jumped to 10 months.
  • The benchmark price continued to fall and is now more than two per cent lower than last year’s levels. The average and median prices fell at a significant rate. This is because a large share of the sales occurred in the under-$200,000 price range.
  • Benchmark prices eased across all districts, but the year-over-year decline was the highest in the North East district, with declines of over five per cent.

Attached

  • Mirroring the trend from other property types, sales for attached product slowed by 35 per cent compared to last year for a total of 273 units. Inventory levels eased to 1,503 units and months of supply totalled 5.5 months. The months of supply has eased from the levels recorded last month, but it remains elevated relative to historical levels for this time of year.
  • The benchmark price trended down for attached product, declining by nearly one per cent over the previous month and nearly four per cent compared to the previous year.

 

REGIONAL MARKET FACTS

Airdrie

  • Sales in Airdrie totalled 99 units in May. Activity has slowed compared to previous years, but the decline has not been as steep as what has been recorded in Calgary. The region has also seen a similar decline in new listings and inventory levels. This has helped push the months of supply back to four months, which is similar to the levels recorded prior to the COVID-19 outbreak.
  • Benchmark prices have eased slightly compared to last month and are relatively stable compared to last year. However, there has been a notable decline in both the average and median prices. The decline in average and median prices is mostly related to the significant shift in activity by price range, as sales continued to improve for product priced below $300,000.

Cochrane

  • Sales in Cochrane have slowed, but the pullback in new listings has outpaced the easing sales. This is causing inventories to fall and lowering the months of supply to under five months, a decline of 9 per cent compared to last year.
  • However, the impact of previous months oversupply has weighed on benchmark prices, which have eased by two per cent compared to last year. However, unlike other areas, the average and median prices have been rising, as sales in the $400,000 – $499,999 range remained stable compared to last year and represent a larger share of overall sales compared to last year.

Okotoks

  • While improving slightly compared to last month, Okotoks sales have remained relatively weak in May. At the same time, inventory decline has helped offset the slower sales, leaving the months of supply at four months.
  • The benchmark price trended down for the third month in a row and year-to-date levels are now two per cent lower than last year.

-CREB