Penalties may apply to your mortgage if you pay off your mortgage prior to the maturity date or if you pay down the principal beyond the prepayment privilege amount.

Different types of mortgages are susceptible to penalties. An open mortgage can be paid off in full, at any time, with no penalty, while a fixed-rate closed mortgage allows only limited penalty-free lump-sum payments and includes a penalty if it is repaid in full before the end of its term. You need to know that prepayment penalties affect refinance.

Most people holding long-term fixed rate mortgages terminate or change their mortgage before the term is up. The average five-year mortgage often lasts only three to four years. What people don’t know is how much of a penalty is the bank going to require to terminate or change the mortgage?

Penalties come in the form of interest rate differential (IRD) charges. IRD charges are basically the difference between the interest you promised to pay and what the lender can earn on your mortgage.

The purpose of an IRD is to protect the banks profit. Banks lend money at a certain rate and need to get a return on the money. The IRD guarantees the bank a return on the investment for capitalizing a mortgage.

Penalties can range from thousands of dollars to tens of thousands of dollars depending on the lender’s specific calculation formula, mortgage amount, rates and time remaining until maturity. Each lender has its own formula for calculating penalties.

Prepayment penalties affect refinance.

In October of 2014 an Edmonton couple made the news when TD Canada Trust charged them $17,000 to end their five-year fixed mortgage early. The couple had been banking with TD Canada Trust for twenty years.

In June of 2014 a Scotiabank customer made the news when he was charged a $7,000 fee for breaking his mortgage. The mortgage holder was a decorated soldier who fought in Afghanistan.

A mortgage broker can help you understand how mortgage penalties work and how to avoid them. A mortgage broker has already asked the major banks the tough questions about IRD charges and how customers are affected. A basic question such as “Will I have a penalty if I get out of my current mortgage?” can be answered by your mortgage broker. It’s safe to say prepayment penalties affect refinance

If you’re with a major bank now it’s important to know how your bank calculates its penalties. Each bank calculates their penalties different. Not only do you need to understand how the bank calculates its penalties you need to know what your specific penalties apply to your mortgage. While most banks now provide a website calculator to help determine prepayment penalties, understanding how it affects you is more difficult.

Contact Vertuity Mortgage to discuss your current mortgage and find out what prepayment penalties may apply to your mortgage.