October 19, 2017

Mortgage Prepayment Penalty

If you have a closed mortgage and you sell your property (or refinance it) you will be charged a prepayment penalty. The amount of the penalty will be determined by the terms of your mortgage. In Ontario it is common for the prepayment penalty to be the greater of the interest rate differential and three months’ interest.

If interest rates have increased since you took your mortgage out, you will be charged a three month penalty. If interest rates have gone down your mortgage company will determine how much they are going to lose over the balance of the life of the mortgage based on current rates. If that is greater than the three month penalty that is what you will be charged.

During 2010 and 2011, it was not uncommon to see very large prepayment penalties, some of them between $10,000-$20,000 on mortgages of no more than $200,000.

When you first take out your mortgage, some banks will give you a “cash back” rather than giving you a mortgage with a discounted interest rate. If you received cash back when your mortgage was first registered, you will have to pay back a proportionate amount of the cash back in addition to your prepayment penalty.

Before you decide to break your mortgage by refinancing or selling your property, you should check with your bank to see how big the penalty will be.

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