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Mortgage Interest Differential

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Pertaining to buying and selling houses, would anyone happen to have the exact wording for section 8.3.09 handy?  I have a 2009 policy book and I think the text is worded incorrectly (or I am not reading it right).
 

dapaterson

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Core benefit

When the new mortgage is higher than the one discharged at the former place of duty, CF members are entitled to reimbursement of the interest differential, to a maximum of $5000, as described below:

The difference between:
The interest rates on the two mortgages

Based on the lesser of:
• the outstanding mortgage at the former place of duty; or
• the new mortgage principal

For:
the remaining term of the mortgage at the former place of duty, not exceeding 5 years

To a maximum reimbursement of:
$5000
 
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Thanks. 

Perhaps I am reading this incorrectly but it seems to me to say that when you port your mortgage from one location to another and the new mortage is higher, then the member is entitled to reimbursement. 

The problem I am having with this is that banks don't charge a penalty when you port to a higher mortgage.  Theya re only too happy when you take on more debt.  Its when you port to a lower amount that they charge you a penalty because they are losing all that interest they would have made on the old mortgage. 

Thoughts?
 

agc

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You're supposed to have a portable mortgage.

This article refers to the extra interest you have to pay on the new term after porting your mortgage if the new rate is higher.
 
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Yes, I mentioned in my post "port".

With a mil move and mortgage interest buy down, the rate is rarely higher.

I am still not convinced that this section is written correctly.
 

Pusser

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Your confusion arises from the fact that there are TWO definitions for "Mortgage Interest Differential" and they are entirely different!

1)  The one mentioned in the IRP Directive is where you move from one location to another and you end up with a new mortgage rate (be it completely new or a blended one) that is higher than your old mortgage rate.  There is some compensation available to help lessen the blow.  This benefit has NOTHING to do with penalties and is not compensation for any kind of fee charged by the bank.  In my experience, this benefit doesn't get paid out very often, especially in recent years where interest rates have been falling.  The term "Mortgage Interest Differential" was written into CF regulations many years ago, long before the banks started using it.

2)  When interest rates started plummeting in the 1990s, the banks starting referring to "Mortgage Interest Differentials" and their definition is quite different from the one talked about in the IRP Directive.  The problem arises from the fact that the banks never discussed their terminology with us (damned inconsiderate if you ask me ;D).  The banks' definition of a "Mortgage Interest Differential" is a fee that the bank charges in order to compensate itself for interest they stand to lose when you break your mortgage early.  It's not a penalty, but I'm not going to go into a lengthy explanation on it either (it's late and I'm camping with a bad WiFi connection).  The banks will also sometimes refer to it as a "Mortgage Interest Paydown."

In all likelihood, the original poster is faced with a situation where definition #2 applies.  In this case, porting the mortgage makes it all go away.  In fact, you have to have a pretty darned good reason for not porting the mortgage nowadays (the regulations are about to be tightened up and clarification is going to be issued soon) and "because I can get a better interest rate on a new mortgage" is not considered a good enough reason.  If you think it is to your financial advantage to terminate your old mortgage and get a new one at the new location, you had better take into account that you could be left on the hook for any penalties, paydowns or differentials that are then payable to the bank.

In summary, definition #2 is the one that most likely applies in most situations today and everyone should expect to pay this charge out of their own pocket if they choose not to port their mortgage (does not apply in cases where mortgage are not portable).  Definition #1 will only come into play when interest rates start to rise again.
 

captloadie

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Do you think the new regs will force members to use only portable mortgages? I believe most VRMs are not portable, so it may be a big decision to make. You would have to weight the savings in paying on a VRM, vs the possible penalty you'd pay if/when you get posted and break your mortgage. I had to break a VRM mortgage after just renewing it because of when I finally sold my house on a posting. The banks had changed the rules to pay either the mortgage differential, or three months payment, whichever was higher. The policy at IRP was to pay only a 3 months payment penalty. I would have been out almost $4000, but the TD Bank, god bless them, waived the additional fee because the CF was forcing me to move. Some other guys that year I heard took very large hits, and their banks had no pity on them.
 

agc

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From IRP 2009:

8.1.04 Mortgage portability

When securing a mortgage, CF members must make every effort to obtain a portable mortgage. When selling a residence, CF members must make every effort to port their mortgage when it is practical and reasonable to do so.

I don't think they can make the policy any more restrictive than this, since they can't legally compel  the banks to issue portable mortgages.

I can't speak to the general availability of portable VRM, but I have one.
 

Redeye

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I've been in the banking business for years.  In terms of a personal residential mortgage, I am pretty sure I have never heard of a non-portable mortgage, I don't think they exist.

And Pusser - I did the lengthly explanation of the Interest Rate Differential Prepayment charge yesterday and then realized that wasn't what was being discussed so I didn't post it.
 

captloadie

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So you are saying that when I tried to port my VRM two years ago and the bank said no they were lying? I doubt it. There are probably no fixed rate mortgages from the Big banks and credit unions, however, I'm sure some of the cheaper mortgage brokers have no portability clauses.

 
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Pusser,

Thanks for that.  Great explanation. 

So, now I am curious.  How many mil mbrs are aware that when they port their mortgage from say Ottawa or Toronto (where their mortgage is higher) to an area like say Petawawa or Suffield (where their mortgage is lower), that the bank will charge them a substantial fee on the interest the bank would have received from the higher amount? 
A rough example is paying out of pocket approx $6000.00 for a reduction from a $300 000.00 mortgage to a $200 000.00 mortgage depending on your interest rate. 
 

Redeye

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I'm surprised, because I just looked into it and I can't see any reference to a non-portable one, but who was the lender?

Cheaper mortgage brokers just originate for banks, usually - many of them are just fronts for banks or trust companies (like Home Loans Canada, in the process of being closed down, was just another brand of CIBC's).

If I remember right, if it's a CMHC or otherwise insured mortgage it has to be portable, but even at that I can't see why it would make sense to not allow porting.

Oh.  Wait - two years ago... maybe they did try to find a way - because that's when variables were priced ABOVE prime, but most people had them with variances below prime, and I can see a lender wanting to find a way to call that in...  But still, seems odd.

captloadie said:
So you are saying that when I tried to port my VRM two years ago and the bank said no they were lying? I doubt it. There are probably no fixed rate mortgages from the Big banks and credit unions, however, I'm sure some of the cheaper mortgage brokers have no portability clauses.
 
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