Array

The two types of mortgage penalty calculations

By Pam Pikkert

We have all heard the horror stories about huge mortgage penalties.

Like the time your friend wanted to refinance her home so that she could open a small business only to find out that it was going to cost her a $13,000 penalty to break her mortgage.

This should not come as a surprise. It would have been in the initial paperwork from the mortgage lender and seen again at the lawyer’s office. A mortgage is a contract and when it is broken there is a penalty assessed and charged. You will have agreed to this.

The institution that lent the money did so with the expectation that they would see a return on that investment so when the contract is broken there is a penalty to protect their interests. If you think about it, there is even a penalty to break a cell phone contract so the provider can recoup the costs they incurred so it stands to follow that of course there would be a penalty on a mortgage.

The terms of the penalty are clearly outlined in the mortgage approval which you will sign.

The onus is on you to ask questions and to make sure you are comfortable with the terms of the mortgage offer. With so many mortgage lenders in Canada, you can very easily seek out other options if needed.

There are two ways the mortgage penalty can be calculated.

1. Three month’s interest – this is a very simple one to figure out. You take the interest portion of the mortgage payment and multiply it by three.

For instance: mortgage balance of $300,000 at 2.79% = $693.48/month interest times three months or $2,080.44 penalty.

OR

2. The IRD or Interest Rate Differential – this is where things get trickier. The IRD is based on:

• The amount you are pre-paying; and,

• An interest rate that equals the difference between your original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of the mortgage.

In Canada, there is no one size fits all in how the IRD is calculated and it can vary greatly from lender to lender. There can be a very big difference depending on the comparison rate that is used. I have seen this vary from $2,850 to $12,345 when all else was equal but the lender.

Things to note:

• You will be assessed the GREATER of the two penalties.

• You should always call your lender directly to get the penalty amount and do not rely on online calculators.

• You can avoid the penalty by porting the current mortgage if you are moving or waiting until the end of the term.

• A variable rate mortgage is usually accompanied by only the three-month interest penalty.

Given that 6/10 mortgages in Canada are broken around the 36-month mark, wouldn’t it be better to find out before you sign how your mortgage lender calculates their penalty just in case?

Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.

Just Posted

United Way Central Alberta holds Sockey Night

Sockey Night in Red Deer is Oct. 21st

Sexual and Gender Diversity Campaign set for next week

Red Deer College’s Students’ Association hosting campaign Oct. 24th and 26th

Red Deer’s election results declared official

New council sworn in on Oct. 23rd

Shalom Counselling to hold evening of celebration

Fall FriendRaiser takes place tomorrow night in Red Deer

Northbound Highway 2 lanes scheduled to open this weekend

One of Red Deer’s busy interchanges set to open northbound lanes Oct. 22nd

WATCH: Foster and Kinship Caregiver Week on now

Red Deer ceremony honours foster families

All three victims identified in Fernie arena ammonia leak

Wayne Hornquist and Lloyd Smith were from Fernie and Jason Podloski from Turner Valley, Alta

4 B.C. prisons install body scanners to combat drug smuggling

The scanners are aimed to combat the smuggling of contraband including weapons and drugs

Outspoken Mountie assigned to admin duties for refusing to shave goatee

The 15-year veteran of the force said he believes the RCMP is targeting him

Victim in fatal ammonia leak remembered for his passion and smile

Friends and colleagues remember Lloyd Smith as someone who was always willing to help people

Plane lands on Highway 97 near Prince George

Pilot safely makes emergency landing on a highway

Canadian planet hunter seeking alien life

‘The shifting line of what is crazy’ says Toronto-born astrophysicist

Firefighter dies battling wildfire in Alberta

“It’s terrible. It will devastate the community for a while here. He’ll surely be missed.”

Health ministers to talk cannabis, opioids

Health ministers set to discuss cannabis and opioids during two-day meeting in Edmonton

Most Read