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The-Mortgage-Gal

Mortgage penalties

Most mortgages in Canada have penalties based on the greater of 3 months of interest or the interest rate differential.  Variable rate mortgages where the interest rate fluctuates with the prime lending rate usually have a 3 month interest penalty.  Open mortgages most variable and fixed are usually at a higher interest rate but allow the borrower to pay out the mortgage at any time without paying a penalty.

Variable rate mortgages have very competitive rates right now depending on the prepayment options and other terms.  Usually the penalty is limited to 3 months of interest but sometimes if the borrower has received an extra discount there may be a larger penalty - for example, 2% of the outstanding balance.  This can make a huge difference if the borrower sells or has to pay out the mortgage earlier than expected.   Another misconception borrowers have is that the 3 month penalty is calculated at the rate on the mortgage.  Some of the major banks charge the penalty based on the posted rate for the current term.  So, for example, if the mortgage rate was 2.15% (Prime-.70%) the penalty may be calculated at 3.85% which is the open variable rate.

Fixed rate mortgages are also offered at competitive rates and in some cases have restrictions in the extra payments a borrower can apply to the principal without penalty.  There are also some lenders that are offering lower interest rates but an increased penalty if the borrower repays the loan before the term is up.  Again this is in the 2-3% range and can increase the cost if the borrower had to sell.  Similarly with variable rate mortgages, if the borrower has a 3 month interest penalty on their fixed rate term of 2.69% sometimes the banks may charge the mortgagor the penalty based on the posted rate of 4.29%.  When it comes to the interest rate differential there is a real spread in the procedure for calculating the penalty.  The interest rate differential is the difference in the borrower’s rate compared to the current rate offered for the remaining term.  For example, if the borrower had a mortgage rate of 2.69% with 3 years remaining and a 3 year rate was 2% then they would pay .60% of the mortgage balance for 3 years with most monoline (non bank lenders). However, again some lenders use their posted rate and the discount the borrower received, so if the posted rate was 4.69% when the mortgage was taken out the penalty becomes 2.69% of the mortgage for the remaining term.  That is a HUGE difference in the penalty.  It is very important that the borrower understand how their penalty is calculated prior to funding their mortgage.  Make sure your lender takes the time to explain this to you before you sign the approval, this is a service some mortgage brokers offer.

 

For more information on mortgage penalties please call 250-862-1806 or email [email protected].



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About the Author

Laurie Baird and Tracy Head are mortgage brokers with Verico Complete Mortgage Services. Together they have over 45 years of experience in the mortgage industry.

As mortgage brokers, Laurie and Tracy spend time getting to know the people they work with and help them understand the mortgage process. They support their clients before, during, and after a home purchase.

Laurie and Tracy are able to offer their clients advice and options. With access to over 40 different lenders, Laurie and Tracy are able to match the needs of their clients with the right mortgage package. They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit:
http://www.okanaganmortgages.com

Visit Laurie's blog at: https://www.okanaganmortgages.com/blog



The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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