It’s important to understand all aspects of your mortgage prior to signing. If you choose a closed term you are making yourself subject to penalties if you decide to pay out your mortgage prior to the term being up. You should be aware of how these penalties could be calculated.
What could cause you to be penalized?
- Paying off your mortgage prior to the maturity date.
- Going over your pre-payment privilege amount per year. For example if your lender allows you to do lump sums of up to 20% per year and you put down more than that.
There are two different ways of calculating a penalty:
Interest Rate Differential (IRD)
The calculation of interest rate differential will depend on the lender and the terms of your mortgage contract. It’s “an amount based on the difference between two interest rates. The first is the interest rate for your existing mortgage term. The second is today’s interest rate for a term that is similar in length to the time remaining on your existing term. For example, if you have three years left on a five-year term, your lender would use the interest rate it is currently offering for a three-year term to determine the second rate for comparison in the calculation.” http://www.fcac-acfc.gc.ca/eng/resources/faq/qaview-eng.asp?id=285
Three Months Interest Penalty
This is calculated based on your balance of your mortgage on the date you want to pay it off. They will use that balance to calculate 3 months worth of interest and that will be your penalty.
For example: Mortgage amount $200,000
Interest rate 3%
Penalty would be $1500
Some lenders also prohibit you from breaking your mortgage early unless you have a bona fide sale. These mortgages are generally known as “no frills mortgages”. So be aware of these conditions prior to accepting the mortgage.
Refer to these websites to see an estimate of your penalty.
- Bank of Montreal
- ING Direct
- Manulife Bank
- Royal Bank
- TD Canada Trust
- National Bank of Canada
If you have any questions please do not hesitate to contact us.