Facts about Payout Penalties
The majority of mortgages arranged these days are considered to be Closed Mortgages. Basically that means technically you cannot get out of the mortgage until the term of the mortgage, that is unless in some cases you are willing to pay a penalty to get out of the mortgage early. You should know however that there are few mortgages that you cannot get out of unless you sell your house. There are also mortgages which are considered to be open, which means there is no penalty for paying off the mortgage before the end of the term.
There are all sorts of kinds of payout penalties. The type of penalty you have within your mortgage has to be clearly defined so you know exactly what you have gotten yourself in to. If the terms of the payout penalty are not clearly defined then it would be my advice not to proceed with that mortgage or any other mortgage like it. One of the most common statements I see regarding payout penalties is “Penalty for full repayment of the mortgage will be the greater of 3 months interest or interest rate differential penalty IRD”. I will now go through some of the different types of payout penalties I have encountered in my experiences.
For the calculations below I will be using the following scenario, please note the actual calculations could vary a little depending on the lender and the formulas used.
2.5 years into a 5 year fixed term of 5%
Today’s interest rate of 2.74%.
3 months interest penalty
Mortgage Balance X Interest Rate X 3 months
Using the variables above I would get;
$350,000 X 0.050 X 0.25
= $4,375 would be your penalty if 3 months interest penalty was used
Interest Rate differential penalty or IRD
Current Mortgage Balance X Interest Rate Differential X Time Remaining
$350,000 X 0.0226 X 2.5
=$19,775 would be the Interest Differential Penalty
(Please note for the example above the number 0.0226 is the difference between the current rate of 5% and the going rate of 2.74%)
Based on the calculations above, if the mortgage payout penalty was the greater of 3 months or interest rate differential IRD then you would be paying the higher amount. This amount would be $19,775. There are also some ways to affectively lower the amount you have to pay in the penalty to be paid by you as you might be able to apply pre-payment privileges to your mortgage prior to calculating your payout penalty.
While I agree it might be expensive to break your mortgage, I can show you ways that you may still be able to save hundreds and maybe even thousands by including the payout penalty in to a new mortgage. Please contact me for further details or to inquire.
Want to know what your penalty might be? Check out the following links to find out what your penalty might look like.
Click on the following links;
Bank of Montreal
National Bank of Canada
TD Canada Trust
Beware of Mortgage Payout Penalties