Mortgage Penalties – Ouch… How Much??

KellyHudsonMortgages • January 1, 2016

Calculator how much Dec2015

When I talk to mortgage clients – I explain a number of items including the various penalties associated with breaking a mortgage prior to the maturity date.


No one enters into a 5-year mortgage contract (term) expecting to need to break their mortgage.

Regrettably life happens and 60% of home owners, break their mortgage before it matures!

There are penalties to break your mortgage, so please check out this GREAT 3 minute video from the Globe & Mail explaining how Banks calculate mortgage penalties for both Variable & Fixed mortgages and how banks squeeze even more money out of their clients by giving discounts off their inflated posted rates  Drawing Conclusions: How much does it cost to break a mortgage?  

To break a mortgage, lenders usually use a 3-month interest penalty, or an Interest Rate Differential penalty (IRD).

The penalty for breaking a fixed rate mortgage is usually the greater of 3-months’ interest, or the Interest Rate Differential (IRD). In some cases, when your mortgage is very close to maturity, the 3-month interest penalty will be higher, but otherwise the IRD penalty is much higher than 3-months interest. Variable rate mortgages usually use the 3-month interest penalty. Some variable mortgages offering lower rates, however, will use an IRD or, in some instances, are closed (you cannot break them) without a bona fide sale of the property. This is also the case for some niche fixed rate mortgage products. With the IRD penalty there can be vast differences from one lender to another. The IRD penalty is based on 3 things:

  1. The principal balance of the mortgage at the time you break it, AND
  2. The difference in the interest rate of the original mortgage and the rate the lender WOULD charge for the term closest to the remaining time on the mortgage (for example if there are 21 months left on your mortgage, the lender will most likely use their 2-year term interest rate as the comparison rate).
  3. The number of months remaining in the mortgage term.

When mortgage shopping, you need to consider the interest rate, along with the terms of the mortgage including:

  • Confirm if there are prepayment privileges, or if it is a totally closed mortgage (except for a bona fide sale)
  • How your lender calculates their Interest Rate Differential (IRD) penalties when breaking a mortgage
  • Their pre-payment privileges (15%, 20% or 25%??)

Let’s have a chat to discuss the next steps to your home ownership.

Kelly Hudson

Mortgage Expert

Mobile: 604-312-5009

Kelly@KellyHudsonMortgages.com

www.KellyHudsonMortgages.com


Kelly Hudson
MORTGAGE ARCHITECTS
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