How to Prevent Expensive Unexpected Charges
Regardless of whether you’re financing for a better rate, selling your house, or moving lenders, breaking a mortgage before the term ends can be costly but occasionally it’s required. How much will it cost you, is the main concern.
Here is where a mortgage penalty calculator comes in handy. It helps you project your penalty payment amount and determine whether moving is financially wise.
What is a penalty on a mortgage?
Early breaking of a mortgage contract results in a penalty fee paid to your lender for lost interest recovery. Factors including your mortgage type, remaining term, and interest rate determine this charge.
Common reasons people break their mortgage are: finding a lower interest rate; selling their house before the mortgage term ends; refinancing to access home equity; and changing lenders for better terms.
But the calculator will assist you in finding whether the penalty exceeds the savings before you decide.
Why Mortgage Penalties Vary
The difference in mortgage penalties comes down to how lenders calculate the prepayment penalty, which varies based on factors like:
- Lender Type – Some lenders (like big banks) use more expensive penalty calculations, while others (like alternative lenders) have fairer terms.
- Interest Rate Differential (IRD) – If interest rates have dropped since you signed your mortgage, lenders charge the difference between your locked-in rate and the new rate they can offer. This can drastically increase penalties.
- Remaining Term – The longer you have left on your mortgage, the higher the penalty.
- Mortgage Amount – Larger mortgage balances result in higher penalties.
- Bank Posted vs. Discounted Rates – Big banks use artificially high “posted rates” to calculate IRD, making penalties significantly higher than those from smaller lenders.
This is why one homeowner might pay $15,000 while another pays $30,000—it all depends on their specific lender, rate, and remaining term.
How the mortgage penalty calculator works
The Mortgage Penalty Calculator projects the fees you might pay if you break off your mortgage early. Usually, it requests the following information:
1. Type of Mortgage
Is your mortgage fixed-rate or variable-rate?
- Fixed-rate mortgages: Carry larger penalties (The greater of three months’ interest or the Interest Rate Differential)
- Variable-rate mortgages: Charges only three months’ interest as a penalty
Example: Fixed-Rate Mortgage Breakage Costs
Let’s say you have a 5-year fixed mortgage at 3.19% with $300,000 remaining and four years left on your term. Here’s what breaking it early might cost:
- Fair penalty lender: ~$2,400 (based on three months’ interest)
- Big bank lender: ~$16,800 (based on their IRD calculation)
That’s a $14,400 difference just because of the lender you chose!
2. Current Balance on a Mortgage
The penalty amount is found from the remaining balance on your mortgage.
3. Interest Rates Right Now
Particularly for fixed-rate mortgages, your current mortgage rate affects penalty computation.
4. Rate of Reinvestment
For a loan of the same term, this is the rate your lender could provide another borrower. Should rates have dropped since you took out your mortgage, the penalty could be more.
5. Pending Term—Months Left on Mortgage
The possible penalty increases with increasing time left on your mortgage term.
6. Administrative Expenses
Breaking a mortgage can cost lenders administration fees ranging from a few hundred to more than a thousand dollars.
7. New Cashbacks or Lender Discounts
Should you be changing lenders, the new lender could offer a cashback or discount. This helps to somewhat offset the fines.
Optimize the Mortgage Penalty Calculator
- Calculate how much you would pay in penalties and whether refinancing will still save you money when compared to expenses.
- Negotiate with lenders; knowing your penalty will help you to demand better terms using leverage.
- Plan your next action: waiting until your term is near renewal could be a wiser decision if fines are excessively harsh.
Knowing Your Rights
Although breaking a mortgage early can have unanticipated expenses, as a borrower, you have the right to clear and open information on prepayment charges. This section breaks out what lenders have to reveal, how they figure out penalties, and how you might make wise decisions before an early mortgage pay-off.
1. Your Right to Details on Mortgage Prepayment
Should your mortgage be held by a federally regulated financial institution, your lender must clearly state prepayment policies, penalties, and important terms. Usually, your mortgage agreement has a readily apparent section outlining these specifics.
2. How Lenders Assess Prepayment Charges
Your lender has to clarify their method of deciding prepayment rates. Should the formula be complicated, they should offer an online calculator, a simplified explanation, or an example to assist you in cost estimates before decision-making.
3. Further Mortgage Prepayment Details
Set by the Canadian Bankers Association (CBA), some lenders adhere to a voluntary code of conduct. This code mandates that they provide extra tools to enable borrowers to grasp pre-payment penalties.
Lenders who follow the code must provide:
- Differences between mortgage types and how prepayment terms vary.
- Ways to prepay without penalties, with real examples.
- Clear breakdowns of how prepayment charges are calculated.
- Online calculators for estimating prepayment fees.
- A toll-free number for expert guidance on mortgage prepayments.
- Annual mortgage statements including penalty-free limits and prepayment choices.
4. Actions Possibly Causing a Prepayment Charge
Knowing what might result in a penalty will help you to prevent needless expenses. You might have to pay a prepayment charge if:
- Make extra payments beyond your mortgage agreement’s allowance.
- Refinance your mortgage before the term ends.
- Transfer your mortgage to a new lender.
5. Where to Find This Information
Banks that follow the CBA’s code must make mortgage prepayment details available:
- In branches across Canada.
- On their websites.
- In written documents upon request.
- If you’re unsure whether your bank follows this code, you can check with the Canadian Bankers Association or review your mortgage agreement.
6. When These Rights Apply to You
Dealing with federally controlled financial institutions, such as banks and federal credit unions, these rights apply. Ask for an explanation since different rules might apply depending on whether your lender is not federally regulated.
Is breaking your mortgage worth it?
If you are obtaining a much lower rate, paying a penalty to break a mortgage can occasionally still save you money. Other times, it would be wiser to wait since the fine is too great.
Run the figures and grasp your options using a Mortgage Penalty Calculator before deciding. And if you’re not sure, a mortgage broker might assist you in identifying the best offer.
Considering breaking free from your mortgage? Start with running the numbers first.
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