One of the most daunting things about a mortgage can be the penalties you may incur if you don’t follow the contract, and this often scares many homeowners. Unfortunately since you have signed and agreed to the conditions, breaking of the contract means you must pay the price. One way to make yourself aware of these penalties is to ask questions to both your Brampton mortgage broker and lawyer, as they both have experience with these types of contracts. To help you in understanding mortgage penalties and what they may cost, I have listed the two ways that you can calculate these penalties below:
- Three months interest:
This calculation is exactly what it sounds like – take the monthly interest portion of your mortgage payment and simply multiply it by three for three months.
Eg. For a mortgage balance of $300,000 at 2.79%, it would be $693.48 per month x 3 = a penalty of $2080.44 - IRD (Interest Rate Differential):
The IRD is based on the amount of money that you are pre-paying as well as an interest rate that equals the difference between your original mortgage interest rate and the rate that the lender can charge today. The lender’s amount is based on what they can charge you when they re-lend you the money for the remaining term of the mortgage. Here in Canada the way the IRD is calculated changes depending on the lender, and it can differ greatly depending on the comparison rate. For this calculation, remember to always call your lender for their rate and do not rely on online calculators.
Another thing to consider is that you will always be assessed the greater of the two penalties, and a variable rate mortgage is usually only accompanied by the three month interest penalty. Although this is usually the case, it is always a good idea to check with your mortgage broker or lender.
The good thing is, it is possible to avoid mortgage penalties when you know what you are looking at. If you need assistance with a potential mortgage contract violation, or just want to be prepared and know what you are agreeing to, contact me today.
