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Understanding Mortgage Penalties
March 27, 2024 | Posted by: Jeremy Schaffner
Understanding Mortgage Penalties
Mortgage penalties can be very costly and may be avoidable. Sitting down with a Mortgage Broker to go over your short to long-term financial goals, and the ‘what-if’ scenarios can prove to be very helpful when it comes to Mortgage penalties.
A Mortgage penalty is a fee that you must pay your lender if you decide to break your mortgage contract before the end of its term. Let’s look at what these penalties are, how they are calculated, and why they are part of your contract with your lender.
What is a Mortgage Penalty?
A mortgage penalty is a fee charged to you by your lender when you break the terms of your mortgage contract. Breaking your contract with your lender may happen in the following examples: transferring your mortgage to a different lender, refinancing, or paying off your mortgage before the end if its term.
Why Do Mortgage Penalties Exist?
Mortgage penalties exist to protect lenders from the financial loss they incur when you exit your contracted term early. When you agree to a mortgage, the lender plans on receiving a certain amount of interest over the term of the loan. If you break the contract early, the lender loses out on some of that interest, hence the penalty.
How Are Mortgage Penalties Calculated? *
There generally are two calculations that lenders use for this purpose:
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Three Months’ Interest: This is calculated as the interest that would have been paid on the outstanding mortgage balance over three months.
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Interest Rate Differential (IRD): This is calculated as the difference between your original mortgage interest rate and the rate the lender can charge today, multiplied by the amount being prepaid, and the time remaining on the term.
It is important to contact a Mortgage Broker to understand your options when looking at purchasing, refinancing, or building. There are many lenders in Canada, and each has its own pros and cons when it comes to mortgage terms. I will try and navigate the options available to you, given your goals that you share with me. We will carefully review your mortgage contract and terms.
*NB The lender will use the penalty calculation that results in the higher fee.
