The Lowdown on Mortgage Prepayment Penalties in Canada
The Lowdown on Mortgage Prepayment Penalties in Canada
Paying off your mortgage early might save you thousands of dollars in interest over the life of the mortgage.
Paying off a mortgage early is a goal for many Canadians. It means being debt-free and owning your home sooner. However, before you make any extra payments, it's essential to understand the penalties that come with prepaying your mortgage.
Here's everything you need to know about the penalties for paying off a mortgage early in Canada:
What Is a Mortgage Prepayment Penalty?
A mortgage prepayment penalty is a fee lenders charge for paying off your mortgage before the end of the term. The penalty is usually a percentage of the outstanding balance or a set amount, whichever is greater. The purpose of the penalty is to compensate the lender for the lost interest income due to the early repayment.
When Is a Mortgage Prepayment Penalty Charged?
In Canada, mortgage prepayment penalties are charged when you pay off your mortgage before the end of the term. The term is the length of time that the mortgage agreement is in effect, which is usually between one to five years. If you make extra payments or pay off your mortgage in full before the end of the term, you may be charged a penalty.
How Is a Mortgage Prepayment Penalty Calculated?
The amount of the mortgage prepayment penalty is determined by the lender and is based on several factors, including:
The outstanding balance on the mortgage
The interest rate on the mortgage
The time remaining on the mortgage term
The type of mortgage
Most lenders use a formula called the Interest Rate Differential (IRD) to calculate the prepayment penalty. The IRD is the difference between the interest rate on your mortgage and the current interest rate that the lender can earn on a new mortgage of the same term. The penalty is calculated by multiplying the IRD by the outstanding balance on your mortgage and the time remaining on your term.
Some lenders may use a set percentage of the outstanding balance or a flat fee to calculate the prepayment penalty. It's essential to read your mortgage agreement carefully to understand how the penalty will be calculated.
Can You Avoid a Mortgage Prepayment Penalty?
You may be able to avoid a mortgage prepayment penalty by making prepayments within the terms of your mortgage agreement. Most lenders allow you to make extra payments up to a certain amount each year without penalty. Depending on the lender, this is usually between 10% to 20% of the outstanding balance.
Another way to avoid a prepayment penalty is to wait until the end of your term before paying off your mortgage. At this point, you can pay off your mortgage in full without penalty.
Should You Pay Off Your Mortgage Early?
Whether or not you should pay off your mortgage early depends on your financial situation and goals. Paying off your mortgage early might save you thousands of dollars in interest over the life of the mortgage. It also means being debt-free and owning your home outright sooner.
However, paying off your mortgage early may not be the best use of your money. If you still have high-interest debt, like credit card debt, it's usually better to pay that off first. Consider investing your extra money instead of paying off your mortgage early. Talk to a mortgage broker in Canada to help you make an informed decision based on your unique situation.
THE BOTTOM LINE
Paying off your mortgage early can be a great financial goal, but it's essential to understand the penalties that come with it. Mortgage prepayment penalties can be significant, so reading your mortgage agreement carefully and understanding how the penalty will be calculated is essential. If you're considering paying off your mortgage early, talk to a mortgage broker in Canada to help you make an informed decision based on your unique situation. Remember, paying off your mortgage early may not be the best use of your money, so consider your financial goals before making any extra payments.
Level Up Mortgages is a mortgage broker team focused on helping the self-employed, new immigrants, non-residents, and investors, access best rate and alternative lending in Canada. We have been nominated for best up-and-coming mortgage broker in Canada in 2021 and have been on CTV News and various publications because of our education-first approach to helping you always stay a step ahead of the process. Contact us for access to our first-time buyer course or a mortgage strategy session.
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Paul Davidescu (www.levelupmortgages.com)
Level Up Mortgages
604-809-3188
paul(at)levelupmortgages.com
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