Mortgage penalties are an important factor to consider when making the decision to purchase a home in Canada. Understanding mortgage penalties can help you make a more informed decision when it comes to financing your home.
A mortgage penalty is an additional fee paid by the borrower when a mortgage is broken prior to the end of the term. This penalty is usually the greater of three months interest or the interest rate differential (IRD). The IRD is the difference between the current mortgage rate and the rate the borrower could potentially get if they were to refinance their mortgage at the current market rate.
Most lenders in Canada require a minimum penalty of three months interest on mortgages with terms shorter than five years. For terms longer than five years, the penalty is usually the greater of three months interest or the IRD.
It’s important to be aware of the potential costs associated with breaking a mortgage before it matures. The longer the term of the mortgage, the higher the penalty will be. This is because the lender has taken on more risk in providing a longer term loan and they must be compensated for the additional risk they are taking.
Many lenders offer cash-back mortgages which allow the borrower to receive a lump sum of money upon breaking their mortgage. These cash-back mortgages usually have a higher interest rate than a standard mortgage and the borrower must pay a penalty when they break the mortgage.
It’s also important to be aware that some lenders may also charge a discharge fee when the mortgage is paid off. This fee is usually around $200-$400 and is in addition to the mortgage penalty.
It’s important to understand all of the costs associated with your mortgage, including potential penalties, before signing the agreement. Doing so will help ensure that you make an informed decision about financing your home and ensure that you are not paying more than you need to.