A prepayment penalty is something you need to pay when paying for your mortgage before the end of its term.
30 octobre 2018
Category Blog
30 octobre 2018,
 0

See why you will have mortgage fees to pay if you terminate your mortgage before the end of your term. When is an early repayment advantageous? How does your financial institution calculate the price of your mortgage penalty? 

 

A prepayment penalty is something you need to pay when paying for your mortgage before the end of its term.

What is a mortgage penalty?

Loss of job, separation, renovation, relocation… A multitude of reasons can force you to sell your home before the end of the term.

In addition, you will know that your financial institution will impose a penalty on you once you pay off what you owe.  The situation can be very frustrating.

A mortgage penalty may be imposed if:

  • You terminate your mortgage contract
  • You make a higher prepayment than that allowed by your lender
  • You need to get cash from your mortgage financing
  • You change lenders before your term expires

You will be told about prepayment fees or mortgage fees.

 

Why do lenders impose a mortgage penalty?

Lenders turn the mortgages they grant into financial products.  They must, therefore, pay interest to people who have invested their capital in their financial institution.

If you make an early repayment, you will no longer pay interest on your loan. However, your lender will still have to pay interest to their investors. Thus, he will need to get compensation from your mortgage penalty.

Why do lenders ask for a penalty when you pay off your mortgage early?

 

Why should you consider penalty fees when comparing mortgage quotes?

The subject of mortgage penalties is often underestimated but like interest rates, they should be considered when speaking with one of our partner mortgage brokers to help you find the best loan package.

In fact, mortgage penalty fees can have a much greater impact on your finances than a difference of 0.1% between 2 mortgage offers.

 

Additional fees to the mortgage penalty

Before breaking your mortgage or proceeding with a transaction that is not in the contract, don’t hesitate to consult your mortgage broker. In addition to penalty fees, other additional costs may be related to termination, such as :

  • Evaluation
  • Administrative fees
  • Notary fees and receipts

Even if your financial institution has offered certain advantages to entice you to sign a mortgage contract or offers « gifts » such as interest rate deductions, or payment of notary fees, the reimbursement of these incentives may be required, in whole or in part.

Beware of gifts!  The actual mortgage compensation fees will be established by the notary from the published rate on the day of the breach of contract.  The result of the calculation of the penalty may be different from the estimate previously established because of the fluctuation of the market rate.  The partner brokers of « Best Mortgage Quotes » have the professional experience and know-how required to get an idea of the cost of the mortgage penalties in case of an early payment or additional payment to guide you through the process and negotiate for you with your lender.

To contact the best mortgage broker in your area, simply fill out the online request form on this page.

You will quickly receive a quote from a reliable mortgage broker, hand-picked and rigorously selected based on your situation and profile.

 

What are the advantages and disadvantages of early prepayment?

Be advised! When negotiating your loan, find how to calculate the mortgage penalty fees.

 

An advantageous mortgage termination

Even if you had opted for a closed loan at the time you signed your mortgage contract or if you are just at the start of the commitment period with your lender, it can sometimes be advantageous to terminate your mortgage despite substantial penalty fees, for instance:

  • You can benefit from a much lower interest rate
  • It would be possible to pay off your mortgage faster while maintaining your payment amount
  • Your reduced interest rate may persist for the next term of your mortgage

For a five (5) year term, if you have 12 to 18 months remaining, your mortgage penalty will be lower. Indeed, the longer the remaining term is, the more advantageous an early prepayment becomes.

A disadvantageous mortgage termination will cost you an arm and a leg.

 

A disadvantageous mortgage termination

A mortgage broker will help you with a prepayment and through the maze of pros and cons of an early termination of your mortgage. For example:

  • Mortgage penalties and fees associated with mortgage termination results in paying a higher amount over the long-term
  • If the sale of your house is expected in the short term, you will not be able to benefit from savings of reduced interest rates
  • The stress test, required to obtain a new mortgage with a financial institution. The eligible interest rate of the latter is higher than the mortgage rate registered in your contract.

The possibilities you lose are higher if the difference between the initial interest rate and the current rate is minimal. For instance, it will be difficult to amortize the mortgage penalty fees if you wish to cancel a contract with an interest rate of 1.5% if you take out a loan with a 1% rate.

Conclusion: It is imperative to do the calculation of the mortgage penalty fees because a prepayment may not be suitable for you. Remember, mortgage penalty fees can range from $8,000 to $13,000.

Is it time to break your mortgage contract? Don’t hesitate to ask for help from your mortgage broker.

 

The types of mortgage penalty calculation

The amount of the mortgage penalty fees depend on several factors such as:

  • The date of the signing of the mortgage contract
  • The amount of the mortgage registered in your contract
  • The expected term of repayment (duration of the contract)
  • The mortgage rate registered in your contract
  • The type of mortgage rate: fixed or variable
  • etc.

The type of mortgage rate will have the biggest impact on the amount of the mortgage penalty fees.

An open mortgage allows you to make prepayments at any time without penalty.

 

Types of mortgage penalty calculations in case of a prepayment

Closed fixed rate only Closed variable rate loan (or fixed)
The penalty will be the value of the lost interest incurred by the lender if these funds were loaned out to you today The penalty represents 3 months of interest on the borrowed capital
Calculation based on the variance between the official interest rate at the time of signing the contract and today’s rate Calculation based on the value of 3 months interest
(rate of interest officially in effect when borrowed* – the current interest rate at the time of termination of the mortgage) x (amount borrowed ÷ 12) x number of months remaining on your mortgage term. (Amount borrowed x the official interest rate when borrowing ÷12) x 3

*(not the rate granted at the time of negotiation)

 

How to calculate the mortgage penalty fee?

 

Sample calculation of mortgage penalty fees

Nicolyn must terminate his mortgage agreement with three (3) years remaining and a mortgage balance of $250,000. With a closed loan, his lender will charge him a penalty corresponding to the highest amount resulting from the following 2 methods of calculation:

 

Calculation of penalty fees equivalent to three (3) months interest

The amount of the mortgage registered in the contract $250,000
The mortgage rate upon signing the contract 4 %
Loss of interest incurred by the lender =

Monthly mortgage penalty

(250,000 x 4%) ÷ 12 months = $833
Calculation of the total mortgage fees $833 x 3 months = $2,500
TOTAL $2,500 

 

Calculation of mortgage penalty fees based on the difference in mortgage interest rates

The amount of the mortgage registered in the contract $250,000
The mortgage rate upon signing of the contract 4%
Time remaining before the term starts 3 years (36 months)
Current interest rate displayed by the lender according to the term For 3 years: 2.84 %
Calculate the difference between 2 mortgage rates 4 % – 2.84 % = 1.16 %
Multiply this difference by the amount of the loan, calculating the monthly fees by dividing the result by 12 months (1.16 % x 250 000 $) ÷ 12 = 2 900 $ ÷ 12 = $242
Multiply these monthly fees by the time (months) remaining before the term expires $242 x 36 months = $8,700

 

5 tips to avoid or reduce your mortgage penalty fees

How to prevent a mortgage penalty?

  1. As you can see, it is not the rate at stake. Your mortgage broker will establish a strategy to maximize your mortgage financing.
  2. Choosing a short mortgage term can be an option: one or 2 years.

 

How to reduce the mortgage penalty fees?

3. The vast majority of financial institutions allow, in addition to your monthly payments, the repayment of an amount between 5% and 25% of your mortgage loan each year. A broker will be able to validate with you if it is possible to pay in advance and address the matter of reducing the penalty.

Lenders may deduct this authorized annual refund from the penalty calculation when you pay your mortgage in full.

For example, if an annual early repayment of 10% is allowed on your original loan of $250,000, or $25,000, the mortgage penalty fees will be assessed on the remaining $225,000.

If this provision is mentioned in your contract, check that your lender takes this into account when performing the calculation.

4. If your contract stipulates that your cancellation can only be done on the anniversary of the date you signed your mortgage contract, you can still reduce the penalty by a few thousand dollars by splitting your refund in two (2)  early payments. To do this, you only need to pay back 30% or 40% of the loan amount.

 

How to avoid a mortgage penalty?

5. You may see your mortgage penalty being canceled, if not significantly reduced if you take out the loan to acquire a new home from the same financial institution.

 

The best strategy to reduce or avoid the mortgage penalty fees is to negotiate.

Your mortgage broker from the network of Best Mortgage Quotes is an experienced negotiator, specially trained to reduce mortgage penalty fees, if possible.

 

Advance mortgage repayment: shop now for the best options

Take advantage of the professionalism of mortgage brokers who are experienced in prepayment, the partner brokers of Best Mortgage Quotes.

Let the best mortgage broker in your area help you to get an idea about the penalty fees for you and guide you through the process of prepaying your mortgage loan.

His experience and expertise allows him to do the work for you and negotiate the best deal possible.

Fill out the online request form on this page. The team of Best Mortgage Quotes will direct your application to the mortgage broker whose services will best suit your needs and budget.

The services of the broker partners of Best Mortgage Quotes are free of charge, fast and without any obligation. Take advantage of it now.

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