What You Should Know About Mortgage Penalties

(October 06, 2011 )

Don't forget to check the terms of your mortgage before selling your home.  If you don't consult your bank or lender beforehand, you may run into unexpected penalties on the completion date.  Some mortgages will even stop you from transferring the home into the Buyer's name.  Here's some information you may want to know:
  • Not all variable rate mortgages can be paid off without penalties.  Many variable mortgages nowadays are in "closed terms" or lock-in for a specific period of time.  Paying them off or selling your home before the end of the term will force you to pay penalties.
  • The penalty you will pay is either 3 months of interest, or an amount called the Interest Rate Differential (IRD).  The IRD is calculated with a complex formula, based on the remain term of the mortgage, and the difference between your mortgage rate and the current market rates. Suffice to say you will not be able to estimate this amount, and it's best to just ask your bank/lender for it.  Note that the IRD can be significantly more than the 3 months of interest.
  • For those investors looking to purchase an investment property, you should look into getting either a variable "open" mortgage or a home secured line of credit.  Both of these options do not have any penalties for paying off the loan early or selling the property at any time.  This is especially important for investors because many times they will not know how long they will be keeping the property.  A good offer may come along, and you do not want to miss out on selling the property because of your mortgage terms.  Even though you run the risk of short term increases in the interest rate, majority of the time, the high cost of penalties means you do not want to take the chance and lock-in your mortgage.