What is a mortgage “rate discount”? I’m looking to rent, which means ditching my mortgage. On my statement (next to my interest %), it shows I have a “rate discount” of 1.34%, which when I punch it in to any mortgage repayment calculator, raises my prepayment $ from $3500 to almost $9000.
I… have no idea what this number is. Can anyone enlighten me as to what it’s for, and why it’s going to cost me so much $$$?
How could you plug a number into a repayment calculator if you don’t know what the number is ?
It is not costing you ! It is saving you !.
How would you feel if the bank forgot to reduce the interest rate on your variable loan ? How would anyone catch them out ?
Well what the do is publish the standard variable mortgage interest rate.
They then give certain classes of customers the discount.
eg large amounts, eg very secure, eg at times when they are losing customers and want to be competitive.
You can track your interest charges are correct by taking the advertised standard rate, applying the ‘rate discount’..its a deduction !
In Canada, you are allowed to break a mortgage by a paying a penalty
The maximum penalty permitted is either 3 months of interest payments, or something called the Interest Rate Differential (IRD), whichever is greater. On mortgages with more than 5 years left on the term, only the 3 month penalty applies.
Let’s say you have two years left on a $100,000 mortgage. You are locked in at 4%, but when you got the mortgage the bank discounted the rate by 1% from 5%. The current 2 year rate the bank is offering you now is 3%. One might think the IRD is:
( 4% - 3% ) * $100,000 * 2 years = $2,000
In fact, the bank figures out the IRD using the non-discounted rate that you didn’t actually pay:
( 5% - 3% ) * $100,000 * 2 years = $4,000
This was a bit of a shock for me when I switched from a fixed rate at 5.14% with a discount of 1.5% to a 3% or so rate, but it worked out best in the long run.
Ah, because when you lower the percentage rate, you pay the loan off earlier.
Having paid off the loan earlier, you then pay more penalty.
Can you just stop making repayments when the balance is really low , and leave it sit at low balance until the end of the contract period ?
Payments are normally a fixed amount of principal plus interest. At the beginning of the mortgage, you pay mostly interest and a small amount of principal. As the balance decreases, you pay mostly principal and a bit of interest.
If you miss payments, you are in default and Bad Things Will Happen.
In addition, we can’t get mortgages longer than about 10 years in Canada, even though a typical amortization period is for 25 years. If you buy a house, you will arrange a mortgage for let’s say $100,000 for 5 years at 3.5% with a 25 year amortization.
You will pay $473 every month for 5 years. At the end of the five years you have paid the bank $13,876 in interest and reduced your principal by $14,528. You then need to pay off the balance of $85,472 or sign a new mortgage. If the interest rate is unchanged and you aim for the same $0 balance date, you now have a 20 year amortization and you keep paying $473.
Calculations are all from http://www.calculatorz.com/united/amortschedule.cgi