The majority of Canadians choose a closed 5yr fixed rate mortgage. While most people don’t expect to have to break their mortgage before maturity there are personal circumstances when you may have to, so it’s important to know how your mortgage penalty is calculated BEFORE you get your mortgage. If you are breaking a closed mortgage before maturity you will incur a penalty. (Pre-payment charge in lender speak)
How are Mortgage Penalties Calculated?
What most people don’t realize is different lenders have different ways of calculating mortgage penalties. The penalty can range from a three months interest penalty (common with Variable Rate Mortgages) to an Interest Rate Differential (IRD) which is common with fixed rate mortgages and can often be a substantially higher penalty amount.
How Can I Check My Penalty?
Since there is no Government Legislated mortgage penalty calculation formula the Financial Consumer Agency of Canada has created a Code of Conduct for federally regulated institutions with regards to how mortgage pre-payment information is disclosed to borrowers. One requirement of this Code of Conduct is to make mortgage prepayment calculators available online.
Mortgage Penalty Calculators
Online mortgage penalty calculators are provided to borrowers so they can easily obtain mortgage prepayment information. In the mortgage penalty calculators you will be able to enter information about your mortgage to get an estimate of the current prepayment charge.
If you play around with the calculators like I did you’ll notice something. Penalties can vary widely between lenders! This shows there’s more to consider than just rate when choosing mortgage.
What If I Want To Break My Mortgage?
Pre-payment penalties can also change on an almost daily basis. If you are thinking of breaking your current mortgage contact us so we can obtain a proper payout statement from your lender.