Looking to break your mortgage term?
Here’s what you should know first!
🏡Prepayment penalties are fees paid to your current mortgage lender if:
• You pay more than you’re allowed towards your monthly/biweekly payments.
• Break your mortgage contract.
• Switch to another mortgage lender before the end of your term.
• Pay off your entire mortgage (including selling your home) before the end of your term.
🏡Factors that affect your prepayment penalty costs:
• The amount you want to prepay.
• The number of months left in your term.
• Interest rates.
• The method your lender uses to calculate penalties.
🏡How are prepayment penalties calculated?
Although prepayment penalties differ amongst mortgage products and lenders, they are typically calculated in two ways.
1. 3 months of current interest payments.
2. Interest Rate Differential (IRD).
IRD is calculated by using 2 rates: the posted rate when you originally sign your mortgage contract and the current rate when breaking your mortgage term. Your mortgage lender will subtract the difference between these two interest rates to determine the interest percentage to charge for the remaining months of your term. Typically the IRD method costs thousands of dollars more than the 3 month’s interest payments.
🏡Tips for reducing or avoiding penalties:
• Make full use of your prepayment privileges.
• Port your mortgage. Some lenders allow you to take your current mortgage to a new home if you are moving.
• Using a HELOC or second mortgage to access equity in your home without breaking your current mortgage contract.
• Wait until the end of your term to prepay.
There’s so much more that goes into your mortgage than just the rate. Understanding your mortgage contract and the prepayment privileges/ penalties associated can save you thousands of dollars throughout your term. If you’re considering breaking your term, let’s connect to calculate your penalty costs to determine whether breaking your contract is financially beneficial or not. ✨
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