When you get your mortgage, you are generally locked into a specific interest rate for a specific amount of time. The amount of time that your interest rate is locked in for is called your term. For variable rate mortgages, the term would be the amount of time that your difference from prime is locked in for.
Your mortgage will have a breakage penalty for paying it off prior to the completion of your term.
There are four kinds of breakage penalties.
- A Bank IRD Penalty, or Interest Rate Differential penalty, is the most prevalent and quite high. In many cases, your penalty can be 4% or more of the outstanding balance of your mortgage.
- The lowest penalty is called a three-month interest penalty. This penalty usually comes with variable rate mortgages. If you were to pay off your variable rate mortgage and your normal monthly interest payments were $500, your penalty to break the mortgage would be $1,500. This penalty is generally around 0.7% of your total mortgage balance.
- The second lowest form of penalty is called a Monoline IRD penalty. This penalty is calculated in a similar way to the bank penalty but is much more favourable. In many cases, the penalty is lower than the variable rate penalty; all penalties are the higher of the three-month interest penalty or the IRD penalty. In this case, the penalty usually ranges from 0.7% of the mortgage balance to 1% of the mortgage balance.
- The fourth form of penalty is a distinct penalty on restricted mortgage products. Your restricted mortgage product may state a specific percentage penalty to get out of your mortgage. There is no formula here – it’s a straight calculation of 2.75 or 3% of the outstanding balance.
When it comes to providing you with advice on your mortgage, your potential mortgage penalties are a big factor in our assessment. Being aware of these differences in mortgage penalty calculations could save you tens of thousands of dollars. We’re here to listen to you and provide the best advice we can based on your unique needs.
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