How to save on Mortgage Penalities (hypotheque)

Sometimes it’s even worse

In most cases, for fixed loans, the prepayment penalty is the higher of three months interest, or the difference between the original interest and new rates of interest, for the remainder of the life of the loan.

YET…there are frequently other circumstances.

There are lenders, including the large mortgage lenders, who try to calculate the rate difference in the way that is most advantageous to them, sort of creative financing. Instead of using the discounted rate that they used on the original loan, they will apply the posted rate, which is usually the highest mortgage rate. This is why it is very important to get an estimate on prepayment penalties from your lender.

(NOTE: The importance of this knowledge is that you will be aware of how critical it is to choose a good lender. If you work with an experienced mortgage broker, he will make sure your loan is placed with a lender who will use the rate that is most advantageous to you.)

Different penalties for different products:

There is a different penalty for the various kinds of loan products:

· Open Mortgage Loan: there is only one type of loan that does not have an early payment penalty. These “line of credit” kinds of mortgages are often open mortgages.
· Fixed closed mortgage loan: The rule for this type of loan is that the penalty is calculated as the higher of either three months interest or the balance of the loan.differential between the contract rate and the current rate, over the life of the
· Fixed closed long term mortgage: Mortgages with maturities of 15 years and over, the penalty for
o For the initial five years of the loan period, is the higher of either three months interest or the differential between the original rate and the current rate, for the balance of the loan period.
o After five years, it is only three months interest.
· Variable closed mortgage loan: Normally, three months interest but sometimes certain lenders only charge 2 months interest and others insist upon 6 months interest as a penalty.
· Mortgage loan “5 in 1”: This kind of mortgage is popular with certain lenders and the penalty is normally 6 months interest.

Reimbursement of cash rebate

There are some mortgage loans that include a cash rebate. In these cases, don’t be surprised that the rate is higher and that you must reimburse the cash rebate equal to the number of months from the time you break the contract to the end of the original mortgage term.

Example: Your original mortgage loan had a cash rebate of 4%. Your mortgage was $200,000, so the cash rebate was $8,000. If you are repaying the loan early, let us say after 30 months instead of the 60 months of a five year loan, you must repay the portion of the rebate. It would be calculated at 31/60th of the whole rebate (31 months left to go on the 60 month loan). Therefore, you would take $8,000, divide it by 31 and multiply it by 60, for a refund of the cash rebate of $4,133.33

And if you are thinking these funds are added to the other penalties, you are right. It can make the total penalties extremely expensive.

You may ask why there is an early payment penalty in the first place.

The great majority of mortgage lenders market their mortgages in a secondary market in bundles of $100-500million. Investors purchase these mortgages and hope to receive a return on their investment for the entire term of the investment. The lender still administers the payments of the loan.

When a mortgage contract is paid off prior to the end of the term (even if it is only a question of a few weeks before the end of the term), the lender has to administer the changes to the contract and pay back the investors who have purchased the bundle of mortgages for the future income which they will now no longer receive because the loan has been repaid. Extra work, therefore charges and a penalty

Another motive is that lenders want to induce their clients to stay with them. This is a method for them not to lose clients.