Mortgage Prepayment Penalties – What you need to Consider

When entering a closed term mortgage, many borrowers do not pay nearly enough attention to the prepayment penalty clause. Often borrowers do not realize the seriousness of these penalties, until they want to get out of their mortgage and they are faced with paying potentially thousands of dollars to do so. When breaking your mortgage contract early, usually because of a refinance or the sale of your home, you will unfortunately have to pay your lender a penalty called a prepayment penalty – unless you are in an open mortgage. But, most borrowers enter into closed mortgage contracts as the interest rates are much lower for closed mortgages than open mortgages.

The prepayment penalty amount you pay will depend on a variety of factors including the day you signed your original mortgage contract, the term of that contract and your existing mortgage balance, rate type and mortgage rate. One of the biggest drivers of your mortgage penalty is whether you have a variable or fixed mortgage rate. Fixed rate holders pay the greater of interest rate differential or three months interest, while variable rate holders pay just three months interest.

As borrowers are coming close to the end of their current mortgage term they should be very clear on their goals. For example, if you believe you will want to pay your mortgage early – say you are expecting to receive a financial windfall in the near future, then you will not want to lock into a new term or you should only renew for a short-term term. Likewise, if you think you will need to move your mortgage to another lender changing the terms of your current mortgage, then these penalties may become payable and you should seriously consider your options before locking into anything.
For those who considering a reverse mortgage, it is very likely you will face the payment of a prepayment penalty to refinance your current mortgage if you refinance before the end of your current mortgage term. If you are considering a reverse mortgage and the end of your mortgage term is near, ask your current mortgage lender to allow your mortgage to float until you have been able to arrange the necessary reverse mortgage financing. This way your mortgage remains open in that interim period between the end of your current mortgage term and when it is paid out in full with the reverse mortgage funds.

The process to complete a reverse mortgage from start to finish can be completed within generally three to four weeks. Often it can be done much quicker depending on where you live, how quickly and appraisal can be done and the availability of your lawyer. The period in which the mortgage would be open would not be that long, but it could save you thousands of dollars in the long run.

If you are thinking of reverse mortgage financing, before you lock into your next renewal term please feel free to call me at 1-855-770-3225 or email joanne@mortgagesforseniors.ca. I would be happy to explain your options and help you navigate the process.

Joanne Thomas
joanne@mortgagesforseniors.ca
1-855-770-3225

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