WHAT ARE MORTGAGE PENALTIES?
Mortgage penalties are a small amount you will have to pay if you wish to get out of your contract before it reaches maturity. These penalties are in place to protect the lender and ensure they recoup some of the funds they’re losing when you’re no longer paying them interest. With proper information, avoiding mortgage penalties may be achieved.
WHY MORTGAGES ARE SO EXPENSIVE TO PRE-PAY?
You’d think that lenders would love you for paying out a loan early—but that isn’t the case. Lenders don’t want you to pay your loan early because they want the interest payments.
Mortgage contracts include specific language regarding the penalties you need to pay if you want to prepay your mortgage.
Whether pay the whole mortgage off in cash, or by switching to a new mortgage, you’ll most likely have to pay these (often) astronomical penalties. Knowing the exact amount of penalties to pay is very important upon signing the contract
The amount of money you’ll pay in penalties for breaking your mortgage will depend on the type of mortgage contract you have.
Variable rate mortgages are mortgages in which the interest rate is adjusted periodically to reflect market conditions.
If you have a variable rate mortgage, the penalty you’ll have to pay for breaking your mortgage is of three months of interest on your current balance.
In other words, if the current balance on your loan is of $100,000 and the interest rate on your mortgage is 2.79%, you’ll be paying $697.50 in penalty.
A fixed rate mortgage is a mortgage in which interest rates and payments are fixed for the duration of the term. This type of mortgage provides monthly financial stability, but calculating the penalty for breaking your fixed rate mortgage is complicated.
First, you’ll need to get the following information:
Next, go to the Penalty Calculator on Ratehub.ca and fill out the information about your mortgage.
Here are a few things you can do to avoid paying astronomical prepayment penalties.
Your mortgage will most likely be the most complicated document you ever sign. That’s why it’s important that you review your contract thoroughly before signing it. This includes looking specifically at prepayment penalties.
Get some help with this from an expert, and make sure you know exactly what you are signing.
Some mortgages include clauses that allow you to pre-pay up to 20% of your mortgage balance per calendar year without a penalty. If you have calculated your penalty and figure out it is going to be astronomical, you can pay down up to 20% of your mortgage, and incur the penalties on the reduced balance.
If you’re looking to buy a new property, one of the ways to avoid paying a prepayment property is to port your mortgage. This means taking your existing mortgage—with its current rate and terms—and transferring it from one property to another. This can only be done if you’re buying a new property at the same time as you are selling your old one, and needs to be approved by your lending institution.
If you are selling your house, this means transferring your mortgage to the buyer. Not all loans will allow you to do this (most won’t, in fact) but it could be an option if your contract allows it and your differential is very high. Ask an expert to look at your contract to make sure you qualify for this.