Definition: Compensation paid to the lender when you prepay all or part of a closed mortgage more quickly than is allowed or prior to the end of the term. Remember, there is no penalty with an open mortgage
Options:
- Prepayment penalties usually fall into two categories:
- Three months interest, OR
- The interest rate differential – the difference between the rate you have on your mortgage and the current rate in the market… this is the potential loss of interest the lender will incur by replacing your mortgage with a new one with someone else. The lender will charge whichever is GREATER, and this can result in thousands of dollars!
There may also be an administration, pay-out fee, or re-investment fee that could range from $200 to thousands!
So how do you select the right one for you?
- We have to understand that the lender committed to not changing the rate for the term of your mortgage and lending you the funds, and therefore you have committed to pay that interest – you are breaking your contract hence the potential large penalties
- Really, there is never a “right one” as ideally you don’t want to pay a penalty at all
- If you do think there is a chance you want to pay this mortgage off in full in the near future, then taking either a shorter term mortgage such as 1 or 2 years or an open mortgage may save you money in the long run
- Each lender has a pre-payment calculator on their website so you can calculate a potential penalty at any time.
