How to Break Out of Your Mortgage Early (& Save THOUSANDS)

so a couple weeks ago i was on reddit and i saw someone talking about getting out of a fixed mortgage penalty by only paying the minimal interest penalty and then a week later a member on facebook group also sent me a link to basically the same thing and asked me my opinion on it now this seems very intriguing to me so i spent some time and looking into it learning about how does it actually work so for this week's video i'm going to be focusing on this taking you from the start to the end what is it how is it done and when does it work and not work so if you're in a fixed rate mortgage now or before or you will be in the future and you think there might be a day where you need to break a mortgage early this would be the perfect video to teach you on that now without further ado let's get started so there are different people posting about this online but here i'll be focusing on just one of the article that is written by martin hasting on his own website now he calls this method the martin mortgage maneuver i have included a link down below so if you want to go through the full article you can check it out over there but what i'm going to do here is going to take you from the start to the end walk you through the situation and give my comment as we go and as a disclaimer everything i'm reading here is based on martin's numbers on his website now to see if this is suitable for you or not make sure you talk to your bank or talk to your mortgage broker to really understand about your own situation so to start he gave some prerequisite on when this is suitable so number one is if you have a fixed rate mortgage right now that's over 1.64 and he's saying that because i believe at the time that he's writing it the lowest fixed mortgage rate is 1.64 so if you have something higher than that potentially you want to think about refinance and number two you want to refinance to a lower rate and or number three for whatever reason you need to break out of your current mortgage and you want to pay minimal interest so basically his story goes something like this it started at 2019 december the mortgage is 504 000 at the start it's a five-year fixed mortgage at 2.49 now by the time it's april 2020 so four months later the mortgage balance is now 498 000 but the outside rate have fell to 2.25 percent so martin was kind of thinking about maybe he should have refinanced out of curiosity he calls the bank about breaking of his current mortgage the bank quoted him 3 100 of penalty and the calculation goes something like this 498 000 which is what he owes by now times its current interest rate 2.49 times three months of interest is 3100. all right so that's fine he decided not to refinance because the rate difference was minimal but then fast forward another six months and it's october 2020 now he has 490 000 in his mortgage he's still at 2.49 percent he has about four years left on his term however the rates outside the lowest rate he can find has dropped to 1.74 so martin did some quick calculation to compare if he was to refinance today for the remaining four point something years that's left he could save himself about 14 000 in interest now obviously that's a huge savings so he decided to call his bank again and thinking that you know it's going to be a 3 100 penalty that was quoted by the bank six months ago or maybe even slightly lower since his mortgage is less than six months ago however the bank came back with a 28 600 of penalty so here comes the first part first we need to understand how come martin's penalty after six months shot up from 3 100 to 28 000 in penalty now to understand this we have to go off to a tangent and talk about how fixed rate mortgage works and how does the penalty calculate this is extremely important for us to understand first because the solution is actually the opposite of this so we're gonna figure out how does this work first now when you have a mortgage if you don't know this a favorable rate and a fixed rate mortgage have different types of penalty calculation for variable rate they're only looking at three months of interest no matter when you cancel it's always three months of interest that's all you have to pay however for a fixed rate they will also look at the three months interest payment but they will also look at a second calculation called ird which stands for interest rate differential so basically what this is is that for a fixed mortgage to the bank it's a guarantee and constant revenue stream for example if you have a five-year fixed mortgage at 2.49 then that is their guarantee revenue stream they would know for next five years at 2.49 now if you were to break out of this mortgage early you would return the mortgage back to them and they would have to take this money and re-lend it to someone else but if the interest rate have dropped already then when they relend this to someone else the interest rate will be much lower than what they give you and so for the bank to recoup this loss they have to calculate what is the difference in the amount of interest that they would have made off of you if you never broke out of this and never have to refinance this to someone else at a much lower rate that difference is the interest rate differential and that's the penalty basically so looking at the interest rate differential penalty the calculation goes something like this is mortgage amount times the years left in your term times the difference between your actual rate minus the bank's current rate even though this equation looks very simple on paper the actual calculation is not as black and white then just taking your actual rate minus your bank current rate and then getting the difference they actually have to introduce another number in this equation called the post-it rate so every bank has a posted rate and that is the bank's official mortgage rate that they would want to charge a client however this rate is very very high usually and nobody will ever have to pay this rate so instead what they do is they will often take the posted rate minus and give you a discount and then give you the actual rate like that so for example in martin's case he is getting a 2.49 originally it's not the bank saying that i give you a 2.94 it's the bank saying that okay i'm gonna take my posted rate which at that time is 5.29 for a five year fixed mortgage but i'm going to give you a 2.8 percent discount so then when i minus that at the end you're going to get your 2.49 that's how they calculate this so your irld penalty now looks something like this it's still the mortgage left times the years left and it's gonna times the difference between actual rate and current rate but inside actual rate is calculated as posted rate minus the discount they're giving you and the current rate is the posted rate now that the bank is listing minus the same discount they gave you in the first place all right so you might say okay this sounds very simple at first but why are you making it so difficult and so complicated now what is actually the purpose here well as you will see in the next part the posted rate is what's going to keep your penalty very very high every year so back into martin's case in 2019 when he first get his mortgage the post-it rate is 5.29 his final rate is 2.49 so this is the bank saying i'm going to give you a 2.8 discount so it's 5.29 minus 2.8 equals 2.49 now in april when he first asked about his penalty that he was quoted the 3100 what was going on at that time was that the ird was still being calculated but the equation looks something like this mortgage amount was 498 000 he has 4.46 years left times the posted rate which is 5.29 minus the discount 2.8 percent that says actual rate and then we're going to minus the current rate but at that time it was still the same posted rate as before so it's still 5.29 minus two point eight percent so at the end this will become zero they cancel out each other so your ird penalty was actually zero but of course the bank is not going to let you walk away with no penalty so when irld is equal to less than the three months interest statement instead of using ird they're going to tick the three months interest as your penalty so that is why we use three months calculation and getting the 3100 there however that's not the case anymore in october 2020 because right now the martian is about four years and two months left in his mortgage the bank is going to use a different posted rate to calculate the current return they will no longer use the five year posted rate but instead they're going to use the four year posted rate which is listed at 3.89 so now the calculation looks something like this he's still at 490k left in his mortgage times 4.167 years left times first the actual rate is going to be 5.29 minus 2.8 just like before minus the current rate but now we're using 3.89 as a post-it rate minus the 2.8 percent the same discount he has before so if you look at the back then you're gonna have a huge difference in your interest differential and then if you times everything together that's how you're going to get the 28 000 in penalty so now do you see why they use posted rate because by having a posted rate they are able to control how much penalty you have to pay so as you get closer to your term maturity they can keep the penalties uh pretty high for you so then it's hard to get out of your fixed mortgage now this is also one of the problem i listed in my other video talking about mortgage pay-off strategy and this is one of the reasons i also you know don't really like traditional mortgage especially fixed rate mortgage because of the ird calculation it makes it very hard to get out early um especially for investment property then you know in case i have to sell it because it's a hot market like right now i might have to eat a very heavy penalty just to get out of the mortgage early and sell my house all right so now we understand how rd works the solution for this is actually the same thing but a complete opposite we just flip it around and apply the same concept the bank have applied to their customers looking at the formula again it goes something like this right rd is calculated mortgage left times years left times posted rate at start minus discount and then minus the posted rate now minus your discount so the key here is the last part we want the posted rate to not drop too much or maybe even the same the closer the posted rate is to the original posted rate we have when we first started the less the penalty will be so like martin's case when he really wanted to refinance he was only getting a lower post rate because his mortgage is now at the four year term mark and they're using a different posted rate so theoretically what he needs to do is to make his current four-year mortgage back up to five-year mortgage when it's back up at five years they're gonna use a five-year posted rate then the ird should be zero just like we saw in the previous calculations and if it's zero then all the bank will charge is the three months interest so in this article he's doing that by doing something called blend and extend all it means is we're going to mix our current mortgage with a much shorter term mortgage mix them together and extend the term back up to five years so in martin's case his old mortgage is 4.167 years left at 2.49 percent he is going to get a .833 years of mortgage off of their bank at two percent adding them together has now mortgaged it back up to five years and have an average rate of 2.41 now by then the five-year posted rate the bank posted is now back down to four point seven nine percent so the bank basically looking at martin's new five-year blended mortgage and they're saying this the post-it rate is 4.79 we're going to minus a 2.38 of discount giving you a final rate of 2.41 then after a month he goes in and he breaks his mortgage now so applying to the same equation as before the ird penalty is going to look something like this mortgage left which is 490k times years left which is five right now because he have re-extended times first part is the posted rate at start minus the discount now because the banks see this as a brand new mortgage because you have blended into a new rate to them is a whole new product they're using the updated posted rate which is 4.79 minus the discount 2.38 and then at the end we're going to minus the last part which is posted right now minus the discount but the post right now is the same as the 4.79 because to them this is a brand new mortgage that this customer only held for one month and they're breaking it so the post-it rate now is 4.79 is the same minus the same discount so at the end the ird penalty is zero now as we said before the bank is not going to let you walk away with a zero penalty so they're gonna charge him the three months interest which is going to be 2952 952 so this is how martin was able to lower from his 28k penalty to less than 3k by blending extent and breaking it right away now does this always work for him he said that scotia and marathon works but not td now he's not sure about other banks but i have talked to mortgage brokers on this and they're saying that essentially it is a hit or miss you really have to communicate with your bank or work with a mortgage broker to find out first because some banks now have starting to have policy to patch this loophole for example they could introduce a grace period as per the mortgage broker set that can really make this not possible anymore but would there be any risk to it and martin's faq page he stated that he doesn't think so because if it doesn't work like you can't break out of it because the penalty for example they have a new policy that patched the loophole so your ird is still going to remain very very high all you have to do is just say you don't want to break out of your mortgage and just stick your to your current blended mortgage which is still going to be a lower rate than before now other than that he also have other faq on his page so i have also provided a link to it in the description below so if you're interested check it out all right so this is going to be a quicker video now i know this has a lot of math inside and i apologize if you know i tried my best to explain as clearly and concisely as possible if it's still confusing maybe you want to rewind and watch it one more time let me know what you think below right do you think this is useful in your situation are you thinking about trying this or maybe you're a mortgage broker and you have scenarios where this works and this doesn't work leave it in the comment below so everybody can learn as well now if you like this kind of content i do upload them e30 est every tuesday so make sure you comment like and subscribe to my channel click the bell button so you get all the notification in the future alright this is jackie coke i hope you found this interesting i'll see you next week bye

Channel: Jacky Kuk

Views: 19,412

Rating: 4.8720002 out of 5

Keywords: How to Break Out of Your Mortgage Early, fixed rate mortgage, fixed rate mortgage explained, fixed rate mortgage penalty, interest rate differential, mortgage penalty, fixed rate mortgage calculation, difference between bank rate and interest rate, fixed rate mortgage vs adjustable rate mortgage, how to get out of mortgage loan, how to get out of mortgage contract, blend and extend, fixed rate mortgage loophole, martin mortgage manuever, jacky kuk

Id: GsPiG2BJw5c

Length: 15min 15sec (915 seconds)

Published: Tue Mar 30 2021