All things being equal, choose your mortgage with the best prepayment penalty
It’s impossible to plan on many of the things that will happen in our lives, like a job loss, illness, divorce, a personal matter, or even finding a better mortgage rate. There are many reasons why you may need to one day break your mortgage and renegotiate.
To break your mortgage, you can expect to pay a penalty – the greater of either a) three months’ interest, or b) the interest-rate differential (IRD). With the IRD, your mortgage lender will want you to pay the equivalent of what they will lose by releasing you from your mortgage and lending the money at current rates.
Unfortunately not all lenders calculate the IRD the same way, and the differences can amount to thousands.
To calculate IRD, many of our lenders take the difference between your contract rate and their current rate that most closely matches your remaining term. That calculation can lead to a reasonable payout penalty. However, a significantly higher penalty will result if the lender takes the difference between your contract rate and the posted rate that most closely matches your remaining term minus the discount you got on your original contract. That’s why professional advice is so important; we know which lenders have the most fair prepayment penalties.
If you are looking for a new mortgage, all things being equal like rate and privileges, be sure to take the prepayment penalty into consideration. If your circumstances change and you need to break your mortgage, having a fair prepayment penalty could save you thousands!
We are experts at providing the advice, education and resources that homebuyers and owners need. When it comes to mortgage penalties, it pays to be informed. And we’re here to help!