Mortgage penalties are unavoidable costs associated with breaking a mortgage term before it matures. In Canada, mortgage penalties are regulated by the Financial Consumer Agency of Canada (FCAC) and are intended to protect the lender from losses that may be incurred if a borrower breaks their mortgage contract early.
For many Canadians, understanding mortgage penalties can be a daunting task. It’s important to understand how these penalties work and what factors can affect the amount you will have to pay. Knowing this can help you make the best financial decisions when it comes to your mortgage and ensure you are not hit with unexpected costs.
Mortgage penalties are calculated based on the interest rate differential (IRD). This is the difference between the interest rate of your current mortgage and the interest rate the lender would have to offer a new customer on the same terms. The greater the difference between the two rates, the higher the penalty. If you are within the first three years of your mortgage, the penalty is usually three months’ interest on the amount you’re refinancing. For mortgages past three years, the penalty is usually the greater of either three months’ interest or the IRD.
In addition to the IRD, other factors that can affect the amount of your penalty include:
– The length of your mortgage term: The shorter your term, the higher the penalty.
– The type of mortgage: Fixed-rate mortgages typically have higher penalties than variable-rate mortgages.
– Your lender: Different lenders may have different penalty structures.
– Interest rates: If interest rates have risen since you took out your mortgage, you may be subject to higher penalties.
It’s important to understand how mortgage penalties are calculated and the factors that can affect the amount you will have to pay. Talk to your lender about the penalty structure and your options for minimizing the penalty if you decide to break your mortgage term early. Doing so can help you make the best decision for your financial future.