If you’re considering breaking the terms of your TD Bank mortgage, you really need to do your research prior to pulling the plug. If not, you could end up with a very nasty surprise in the form of thousands of dollars in penalties. That was the case for a Toronto woman who was forced to break her TD mortgage and charged $29,530 in penalties for doing so. Nearly $30,000 to break a mortgage? How is that even possible?
Turns out that it’s not very difficult at all, and TD is not alone in their customer gouging. All the big Canadian banks use very similar calculations to determine the cost of breaking their mortgage agreements. Although some minor variations exist from bank to bank, and province to province, the method is essentially the same.
The first thing TD is going to look at is whether your mortgage interest rate is fixed or variable.
If you have a variable rate mortgage, you’re in luck! Your penalty is calculated at 3 months’ worth of interest. TD will also throw on a discharge fee that varies from province to province, but the calculations are pretty straightforward.
You can find a mortgage prepayment calculator on TD’s website. If you’re looking for a more comprehensive penalty calculator that allows you to easily compare different banks, try the one at Ratehub.ca.
While the penalties for breaking a variable rate TD mortgage are fairly easy to calculate (3 months’ interest) things get A LOT more complicated if you have a fixed rate mortgage.
With a fixed rate mortgage, the bank has two options to calculate the penalty, and it should come as no surprise, they use the higher number.
- 3 months’ interest
- Interest Rate Differential
We’ve already gone over the first method. Now let’s take a look at the Interest Rate Differential (IRD).
If TD Bank calculates your penalty using the IRD method, they will compare the interest rate you locked your mortgage in at, and the difference between the original rate and that of a current a mortgage product today that would cover the remainder of your term. They will determine how many months remain on your current term, and the amount of interest payment they are losing by you breaking your mortgage.
This IRD-calculated penalty is always going to be larger than the 3 months’ interest, typically several times larger, and it only gets worse as interest rates come down. That’s because the gap continues to widen between what you originally signed as a mortgage rate and what the bank is now offering for a competing term. As that gap increases, so does the IRD payment.
The last factor to consider when breaking your TD mortgage is whether you took a cashback option when you signed your agreement. If so, you can expect to have to pay at least a portion of that back.
Breaking your mortgage is not something that you do lightly. While it might initially appear that you are saving yourself money, you need to understand the complicated system that banks use to calculate your penalties for walking away from their mortgage.
The more you know about this, the better prepared you are to make your decision and do what’s right for you.