So, you’re curious about mortgage prepayment penalties? You’re in the right place! Let’s break it down and explore everything you need to know about these fees.

When you take out a mortgage, you agree to make regular payments over a specific period. But what if you want to pay off your mortgage early? That’s where prepayment penalties come into play. These penalties are fees charged by lenders when borrowers decide to pay off their mortgage before the agreed-upon term. They compensate lenders for the potential loss of interest income they would have received if you stuck to the original repayment schedule.

There are different types of prepayment penalties:

Interest Rate Differential (IRD): The most common type in Canada, IRD is calculated based on the difference between your original mortgage interest rate and the current rate the lender could charge on a new mortgage. It reflects the lender’s lost interest income.

Three-Months’ Interest Penalty: This straightforward penalty is based on three months’ worth of interest payments on your outstanding mortgage balance, often found on variable or adjustable-rate mortgages.

Fixed Rate Mortgage Penalty: A known percentage of the mortgage is charged if paid out early. Some restrictive mortgage products might only allow early payout in case of an arms-length sale of the property.

It’s crucial to know how your lender calculates these penalties, as the difference can be substantial. Some lenders offer more flexible terms allowing extra payments or full payoffs without penalties, known as “open” mortgages, usually with slightly higher interest rates.

Lenders impose prepayment penalties to compensate for lost interest income, ensuring they cover their borrowing costs and make a profit.

Remember, only your current lender can provide the exact prepayment penalty you’ll pay, as they have full access to your mortgage terms.

In conclusion, understanding mortgage prepayment penalties can help you make informed financial decisions. Whether it’s the IRD, Three-Months’ Interest Penalty, or Fixed Rate Mortgage Penalty, knowing the specifics of your mortgage agreement is essential.

Let’s get in touch if you have any questions.

Your trusted & friendly Mortgage Agent:

Divyang Patel – 647.740.8902

www.divyangmortgages.ca