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How To Save On Mortgage Penalities (hypotheque)
By Gregory van Duyse
Sometimes charges are even worse

The normal amount of penalty for the early payment of a mortgage is the higher of: Three months interest or the difference between the old loan rate and current loan rates, for the remainder of the loan period.

HOWEVER…it is not always the case.

Some lenders (even the large financial institutions) will instead choose to calculate the difference between the two rates for the end of the term of the loan in a rather interesting way. They decide to use the posted rate, usually the highest mortgage rate rather than the discounted rate. This is why you should always ask your lender for a penalty payment estimate.

(NOTE: The importance of this knowledge is that you will be aware of how important it is to choose a good lender. If you work with an experienced mortgage broker, he will assure your loan is placed with a lender who will use the rate that is most advantageous to you.)

Different penalties for different products:

There are different types of loan products, and each of them has its own type of penalty:

· Open Mortgage Loan: these are the sole loans that do not have a penalty for pre-payment. The kinds of “line of credit” mortgages are often open mortgages.
· Fixed closed mortgage loan: In general, the penalty is calculated as the higher of either three months interest or the difference between the original rate and the current rate, for the rest of the term of the loan.
· Fixed closed long term mortgage: Home loans that have maturities of over 15 years
o For the first five years of the term, is the higher of either three months interest or the difference between the loan rate and the market rate, for the rest of the term of the loan.
o After five years, it is only three months interest.
· Variable closed mortgage loan: Normally, three months interest but it happens that certain lenders only charge 2 months interest and others will charge 6 months interest as a penalty.
· Mortgage loan “5 in 1”: This is popular among some mortgage lenders. The penalty is usually 6 months interest.

Reimbursement of cash rebate

Certain home loans include a cash rebate.

Of course, the rate is higher and you have to reimburse the amount of the cash rebate equivalent to the number of months between the time you break the home loan contract and the end of the mortgage term.

Example: Your mortgage included a cash rebate of 4% of your mortgage for $200,000, or $8,000. If you repay the mortgage after 30 months (instead of the 60 months for a 5 year mortgage), you have to repay a certain portion of this cash rebate. In this case, it is figured as 31/60th of the whole amount, which corresponds to the 31 months difference between the 30th payment and the 60th payment. Therefore, $8,000 X 31, ÷ 60 = $4,133.33, which will be the amount of the reimbursement of the cash rebate.

And if you are thinking this amount is added to the other penalties, you are right. It can make the total penalties extremely expensive.

You may ask why there is an early payment penalty in the first place.

In the world of mortgages, very few banks hold onto the loans they make. They continue to administer the loan, but they sell the loans in the secondary mortgage market to investors, who buy these mortgages in lots of $100 to $500 million. These investors plan on earning the interest on the loan for the rest of the term.

When a home loan contract is paid off prior to the end of the term (even if it is only a question of a few weeks before the end of the term), the lender has to administer the changes to the contract and pay back the investors who have purchased the bundle of mortgages for the future income which they will now no longer receive because the loan has been repaid. Extra work, therefore charges and a penalty

Another motive is that lenders want to induce their clients to stay with them. This is a method for them not to lose clients.

Gregory is an Accredited Mortgage Professional (AMP). To get more information on mortgage rates - taux hypothecaire, please visit: Mortgages - hypothèque

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