Many homeowners—especially those without a mortgage broker—don’t fully understand mortgage penalties. And I get it! Financing a home can be overwhelming. But if you’re considering refinancing, selling, making a lump sum payment, or need a way out, read this first.
The most common mortgage penalty my clients encounter is a prepayment penalty. Did you know? Your lender doesn’t want their money back early! That’s because they earn guaranteed interest on the loan, helping them not only budget but also profit. Let’s go over the types of prepayment penalties:
Prepayment or Overpayment:
Transferring:
Early Re-Payment:
Breaking your mortgage for these—or any other reason—almost always results in financial penalties. The amount of the penalty that could be owed will be based on a few factors:
- The amount of pre-payment or over-payment
- Interest rates (existing and new)
- The type of mortgage (open, closed) and the type of rate (fixed, variable)
How can you reduce or avoid prepayment fees?
The simplest answer is to wait until the end of your existing term to make changes. If that’s not possible, let’s review your circumstances:
- Do you have a fixed or variable rate? If you have a variable rate and you’re breaking the mortgage in favour of a fixed option, first check to see if you can lock in a rate under your existing terms
- Are you making a lump-sum payment? Review the terms of your mortgage to see what your annual prepayment allowance is. Most mortgages will let you make some fixed lump sum payments without any penalties.
Penalties for non-payment
There’s also a flip side to penalties, which involves incurring a penalty because you’re making a late payment or missing payments.
You won’t be surprised that any payment received after the due date will incur a fee. Lenders will also report the missed payment to the credit bureau, which will impact your credit score. Before you miss a payment, the best thing you can do is to notify your lender (especially before it happens) and let them know. You can work together to defer a payment, skip a payment, or make other alternative arrangements.
If you’re with a lender that offers it, consider taking a ‘mortgage payment holiday’ and either skipping or deferring payments for a specific amount of time. Some lenders allow up to 3-6 months or possibly longer, depending on the circumstances.
If you have already missed a payment, you should make up that late or missed payment as soon as possible to avoid a quickly escalating situation.
When can penalties be worthwhile?
An alternative to mortgage penalties
If you’re likely to break your mortgage agreement, consider an open mortgage. This is a great short-term solution for anyone who has an inheritance coming up, is planning a move out of town, or perhaps getting married (or divorced) and planning to combine (or separate) assets. You regularly pay the mortgage as long as you need it, but when you sell the property—no worries. This option does typically come with higher rates, but the benefit is that there are no penalties to pay it off at any time.
Whatever type of mortgage penalty you might be facing, my best recommendation is to talk to me for expert advice. Do this before you make any commitments so we can go over the fine print and you can understand what you’re getting into! I always take the time to do this with my clients, and I would be happy to assist you also.
Tim Ward, Collingwood Mortgage Broker.
