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Prepayments & Penalties

Your guide to reducing unneccessary mortgage penalties to your lender.


So you are planning to payout your mortgage mid term and move to China (Zàijiàn), what can you do to reduce your penalty?


A prepayment penalty is charged to borrowers who pay off their mortgages before the loan's maturity date. If you just came into a large sum of money and no longer want to carry that mortgage debt, you could potentially be paying the bank loads of dough to get out of your mortgage term/commitment.


Don't fret, there are some potential ways to help reduce this debt.


Why does a lender charge a prepayment penalty?


Banks are in the business of making money and they can lose interest on the funds that are committed to you when you sign your mortgage commitment and don't carry it to full term. The penalty is charged to make sure the lender isn't left penny less should you choose to jump ship.


There are two most common types of prepayment charges: 3 months interest on the remaining balance or the interest rate differential (IRD). The interest rate differential is calculated on the difference between your current interest rate and the interest for the remaining term of your mortgage.


Your commitment from the lender will show exactly what you are responsible for should you choose to end the term early. Be extra careful to read all the fine print!


Let's look at some tips to help reduce additional interest paid to the lender:

 

1: Prepayments


Your specific mortgage product will have a prepayment allowance. This refers to the amount of money you can put towards your mortgage within each calendar year without paying a penalty. Some lenders offer 15% of the original principal balance, while others may offer 20%. While this difference may not seem substantial at first glance, the larger the loan amount the bigger the difference in interest. Be careful to inquire with your mortgage broker about what your lender's terms are before signing on the dotted line.


2: Increase your payments


Many lenders offer an option to increase your original scheduled principal and interest payments - some even up to 100% during your mortgage term. This is a great option if your finances permit it accordingly, as it will help to pay down your balance faster. With a smaller balance, in turn, comes a smaller eventual penalty to the lender. Other options available are to change your payment from monthly to biweekly accelerated or weekly accelerated. This will have the same effect!


3: Porting


What does a mortgage port mean? This is when you take your existing mortgage (exact same remaining rate and term) from one property to another. If the sale and purchase dates coordinate accordingly, you can simply just transfer your mortgage from one to the other without paying a penalty to the lender. This is a great option if you are looking to upsize and have additional funds to put down on the new mortgage but want to keep your existing mortgage rate (in today's day and age, this is a no brainer).


Tip: Ask your lender about the option to "blend & extend" as well. There may be some savings here if you need to increase the mortgage slightly in the event that you are upsizing.


At the end of the day, we are all have a financial plan that we are striving towards. Make sure to ask your mortgage broker how your mortgage terms will help get you to where you want to be.





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