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How to avoid paying a penalty to switch mortgages

A few weeks ago I was looking at switching my mortgage to either ManuLife One or National Bank’s All-In-One mortgage products. I wanted to do this because I want to take advantage of lower rates, as well as access the equity in my house, and these products were more flexible at doing this than my Bank of Nova Scotia mortgage.

I was speaking with a friend of mine this week who wanted to do the same maneuver (not Smith Maneuver), but was faced with the same dilemma I had: a STEEP fee for switching in the middle of the mortgage term. We are talking thousands. Ouch.

Alas, how to avoid the fee of switching mortgages in the middle of a term.

I simply told the people I was dealing with at the new mortgage companies that it wasn’t worth my while to pay nearly $5,000 to switch mortgages. It was just better to wait until the term was up for renewal.

It was only then that they told me that the Home Equity Line of Credit could simply be set up in a “second” position. I didn’t think Manulife One would do that, but they do.� This way, I could take advantage of the flexibility and lower rates, but avoid the cancellation fee for the first mortgage. Brilliant!

It was only when I was speaking with my friend that I realized that I wasn’t the only one with this problem, so I thought I would share this with you.

Next thing you can start doing once the second mortgage is set up, is simply write a check from one to the other. Most first mortgages allow you to prepay a certain amount / percentage each year. In effect, you simply start transferring one mortgage to the other in chunks. Effectively though, this gets around the fee.

The kicker is though that there may be a minimum for setting up the mortgage in the second position. When I finally went with Manulife One, the limit was $50,000. Now I hear that they’ve raised it to $75,000. I’m not sure what National Bank’s minimum is, but it would be worthwhile giving them a call to find out.

Lastly, make sure you collect points (specifically: Your Leverage Rewards) when you decide which company you want to go with. We’ve lined up mortgage brokers that will give you points on National Bank’s product, and I can give you the name of the lady who grants points on the ManuLife One product.

There’s no need to pay a mortgage penalty. Just get creative and you will avoid it.

Doug Anderson

Founder Your Leverage Blog & Your Leverage Rewards

Posted in Blog.

6 Responses

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  1. cc said

    Do you have to pay a penalty on paying out quicker though?

  2. Most lenders will usually let you “pre-pay” a mortgage without any penalty. It can be anywhere between 15%-20%. So if you have a $200,000 mortgage, you should be able to easily prepay $30,000 or more without paying a penalty.

    Of course, the condition of getting the second mortgage is that you have to have enough equity to do the shuffle. If the house is valued at $300k, with a $200k mortgage, you have up to $100k to work with (the difference). So say you get a second mortgage at lender B for $90k. Even if you were limited to prepaying $30k per year without a penalty, you could still pay down $90k over 3 years.

    Hope that helps!

  3. I REALLY liked your post and blog! It took me a little bit to find your site…but I book marked it. Would you mind if I but a link back to my site?

  4. Mary,

    Yes, feel free to put a link to this blog on your site.

    Here’s a link:


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