What is a Mortgage Penalty?
A Mortgage Penalty is a fee that is calculated and issued by the lender should a borrower end or terminate their mortgage contract prior to the maturity date. Some examples of the actions that would trigger this penalty are the sale of the mortgaged property, refinancing your mortgage, switching your current mortgage to a new lender prior to maturity or exceeding your maximum pre-payment limit (extra payments).
If any of the above situations occur, the lender will consider your contract void and the penalty will be issued.
If any of the above situations occur, the lender will consider your contract void and the penalty will be issued.
How Are Mortgage Penalties Calculated
Each lender will calculate mortgage penalties using a slightly different method. It is very important that you clearly understand how the penalty will be calculated prior to signing a contract with a lender as it could be the difference between you having to pay a minimal amount to exit the contract or paying several thousands.
The type of lender and product you choose will determine which calculation is used to calculate the penalty amount.
If you break a variable/adjustable rate mortgage early, your penalty will be equal to 3 months of interest at either your current rate or at the lender's prime rate, depending on the lender.
Fixed rate mortgage penalties require a little bit more attention to detail as there are multiple ways to calculate the amount. These penalties are calculated at three months interest or by using an Interest Rate Differential Calculation (IRD Calculation), whichever is greater.
But wait, there are actually 3 different ways that Lenders can calculate IRD Penalties and it's important that you understand which method is being used on the mortgage you are considering signing before you sign it.
Those three methods are:
**Posted Rates - Banks and Trust companies advertise posted rates on their websites which are significantly higher than the rates they actually give their clients. These rates are used in Mortgage Penalty calculations which will drastically increase the overall penalty amount**
The Standard IRD Penalty calculation works out to be the cheapest option because it does not factor in posted rates. This ends up being a great option for borrowers that are unsure about exactly how long they plan to live in or keep the property for.
The Discounted Rate IRD Penalty Calculation and the Posted Rate Penalty Calculation both include posted rates in their calculations. The Lender uses their posted rate to determine how much of a "discount" the borrower received when they initially signed their mortgage contract. That "discount" then gets factored into the penalty calculation which will drive the penalty amount up much higher than the Standard IRD Calculation.
Make sure you discuss the information above with your mortgage specialist before choosing a lender and/or mortgage product.
The type of lender and product you choose will determine which calculation is used to calculate the penalty amount.
If you break a variable/adjustable rate mortgage early, your penalty will be equal to 3 months of interest at either your current rate or at the lender's prime rate, depending on the lender.
Fixed rate mortgage penalties require a little bit more attention to detail as there are multiple ways to calculate the amount. These penalties are calculated at three months interest or by using an Interest Rate Differential Calculation (IRD Calculation), whichever is greater.
But wait, there are actually 3 different ways that Lenders can calculate IRD Penalties and it's important that you understand which method is being used on the mortgage you are considering signing before you sign it.
Those three methods are:
- Standard IRD Penalty Calculation - used by Monoline Lenders and some Trust companies (cheapest option)
- Discounted Rate IRD Penalty Calculation - used by Banks and Trust companies (more expensive)
- Posted Rate IRD Penalty Calculation - used by Banks and Trust companies (most expensive)
**Posted Rates - Banks and Trust companies advertise posted rates on their websites which are significantly higher than the rates they actually give their clients. These rates are used in Mortgage Penalty calculations which will drastically increase the overall penalty amount**
The Standard IRD Penalty calculation works out to be the cheapest option because it does not factor in posted rates. This ends up being a great option for borrowers that are unsure about exactly how long they plan to live in or keep the property for.
The Discounted Rate IRD Penalty Calculation and the Posted Rate Penalty Calculation both include posted rates in their calculations. The Lender uses their posted rate to determine how much of a "discount" the borrower received when they initially signed their mortgage contract. That "discount" then gets factored into the penalty calculation which will drive the penalty amount up much higher than the Standard IRD Calculation.
Make sure you discuss the information above with your mortgage specialist before choosing a lender and/or mortgage product.
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Castle Mortgage Group
100-1345 Waverley Street
Winnipeg, MB, Canada
R3T 5Y7
100-1345 Waverley Street
Winnipeg, MB, Canada
R3T 5Y7