Expert: Cinzia Dalgarno - 8/6/2009

Question
Hi Cinzia,
I currently have a CMHC insured mortgage and am just entering the 4th year of a 5 year term.  We have sold our house and due to the lower interest rates currently than when we originally took out the mortgage, I am interested in paying this one out and taking a new mortgage for the new house.  There used to be a stipulation that after 3 years of (at least) a 5 year term, on an insured mortgage that you would only pay a maximum of a 3 mo interest penalty even if the IRD was higher.  When I asked my bank rep about this, he was not aware of it.  Are you aware of this being the case in the past and if so, is it still available?

Thanks,
Angela

Answer
Hello Angela! Yes, you're right, CMHC did indeed have such a policy at one time; unfortunately, this policy was eliminated as of August, 1999. However, if your mortgage was originally obtained prior to Aug/09, it may still be in effect (depending on what your renewal agreements stated, after that date - the bank may have incorporated a "previous existing CMHC prepayment clause is no longer applicable" statement...you know, in the fine print, where you'd not be likely to see it!
At the bottom of my answer, I've included the CMHC Bulletin that advised of the change, for your perusal.

You didn't indicate how long you've had this mortgage (you might be in your 3rd consecutive 5yr term!), but let's assume for a moment that you do not in fact, have access to the "3 months interest" prepayment penalty. In that case, you have a few options:
-most banks will give you 45 days after the completion date of the sale of your home, to port your mortgage over to a new property. This would of course be subject to a full application and approval process; if you choose to do this, you will then have further options as follows:
1. Early Renew; assuming you are not increasing the mortgage amount, you can early renew to a new term, for example, a 5yr term; the bank will blend your existing rate with the current rate for the 5yr term, so that in effect, you will pay your existing rate for the first 12 months, and the new rate for the final 48 months of the 5yr term - only they will blend the rates so that you pay 1 rate continously for the entire 5yrs.
2. Increase and Blend; this means you will increase your mortgage amount (for example, your existing mortgage is $100,000 but you need $150,000 in order to purchase the new home). The bank will lend you the "new" funds at the current rate for whatever time is remaining in your term - for example, you said you had 1 year left in your 5yr term. The bank would give you the extra money you need, at the current 1yr rate,and continue lending you your existing mortgage amount, at the existing rate, for the remainder of your term. Again, your rate would be blended proportionately to allow for this, so that instead of paying 2 mortgage payments you will pay 1 mortgage payment amount, for the remainder of your term.
-Blend and Extend; This means you want to increase your mortgage amount, and early renew. There are 2 separate calculations involved here, first to calculate the blended rate to allow for the increased mortgage amount, and another to increase the term.

Be careful though!
Some banks may not use current discounted rates when doing the above calculations - they may use their current posted rates (I know of at least one bank that does this); thus, by choosing any of the "extend" options, you may be avoiding paying an actual penalty (which you would normally incur if you break your existing term for whatever reason), but in the end, you will be paying more interest than you're expecting. Posted rates can be as much as 1.75% higher than discounted rates, to give you an idea. Using posted rates in the above calculations will give you an overall higher rate as an end result.

CMHC BULLETIN:

Date:   July 8, 1999

CMHC is pleased to announce some changes or clarification of policies related to Prepayment provisions, Basic Service loan processing and CMHC mortgage loan insurance in National Parks.

Prepayment Clause
NHA insured mortgages have had a prescribed prepayment provision since inception.   Up to 10% of the capital can be prepaid at the first and second anniversaries and the balance of the mortgage can be prepaid on the third anniversary with a maximum penalty of three months interest.

CMHC recently announced that it was ready to eliminate its prepayment provision provided that:
lenders offer NHA borrowers a greater choice of prepayment terms through a full range of
options differentially priced at market, and;
lenders disclose all options in plain and simple language enabling the borrowers to make
informed comparisons and decisions.

Effective August 16, 1999, CMHC prepayment privilege will no longer be a mandatory requirement.  For loans that were underwritten prior to this date, this policy will be applicable at time of loan renewal, subject to the borrower's explicit agreement.
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Hope this was helpful to you,