Amending a Point About the IRD Buy-out/Penalty

So previously I wrote a definition of the Interest Rate differential (see below w/ classic Family Guy moment). I am going to avoid my opinion on the preference for lenders to call the IRD a 'buy-out' instead of a 'penalty' (which it is, oops). 

Interest Rate differential (IRD) If you wish to perhaps buy out your mortgage as you found a better rate elsewhere or wound up with a lot of extra cash, an IRD is what your bank will charge you for breaking the term's agreement. It handcuffs a lot of owners who may wish to take advantage of lower rates as an IRD can run into the thousands of dollars. Simply put, the IRD can be equivalent to a kick in the balls when you check into how much it would cost to pay out your mortgage.

there's your IRD!

Anyways, the large kick to the balls when you find out that if you wish to take advantage of lower rates will cost you $2000-$20,000 is the #1 reason people stay with their current mortgage lenders. 85% of these people inquiring as to penalties buy-outs are with the Big Banks. They, in turn, are being pro-active in keeping you (their best, loyal contributor to their shareholders) from switching over to a smaller lender that offers better savings.

That's just the interest I'm paying for my mortgage?

YET, is that penalty buy-out enough to stop you from investigating your options? 

The answer should be NO.

Near all banks offer mortgage penalty buy-out calculators on their websites. It is usually the first place people go to when they are interested in finding out how much it costs to switch their mortgage. But what those Big Banks don't offer you is a comparison mortgage savings calculators. 

First, before you get too emotionally involved in what I am about to explain- is your mortgage fixed or variable? If it is variable, the penalty should only be 3 months interest. For most 'average' mortgages (say...w/ $200,000 owing) that means your penalty should only be a couple thousand. If your rate is already around the 3% range or lower, then I'd make an educated guess that you are sitting pretty. You are free to go outside and play or continue surfing the Net. 

Those still sticking around; 

Okay, if you are still with me you should have a fixed mortgage. Now here's the secret; perhaps that new, better rate your broker can find you is still more economical in the long term. 

Let's Keep it Sweet and Simple;

Say you checked into how much it will cost you to begin switching your mortgage lender and found you have a penalty buy-out of $5000. 

Now say your broker shopped your mortgage around and they found you a rate that is .25% better than your current rate. They crunched the numbers and found that you would save $8000 switching over the life of your mortgage.

So to recap; You pay $5000 in penalty buy-out but save $8000 in interest. 

Time for the Math...

There's $3000 in savings or a loss of interest income to that Big Bank that is quick to inform you of the penalty buy-out but not the savings.

So although that penalty buy-out may sound intimidating, it wouldn't hurt to have a professional broker investigate this further for you for free. 

Hope it helps!