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Mortgage Penalty Estimator

Below you’ll find calculators that will estimate Prepayment penalty of  Canada’s top lenders. Note this is only an estimator but it can help you when you have a client looking to break their mortgages.

How Do Mortgage Penalties Work?

For most variable mortgages, penalties are typically three months’ interest. That can mean three months of interest at your actual contract rate or three months of interest at the lender’s prime rate, a meaningful difference.

For fixed rates, they’re usually the greater of three months’ interest or the interest rate differential (IRD). IRD compensates a lender when the rate it can reinvest the prepaid mortgage money in is lower than the rate the client agreed to. Sometimes IRD penalties can be brutally punitive, especially at Canada’s biggest lenders.

Here are examples of each from the FCAC.

Exceptions to the Rule

A few lenders charge up to 3% of principal, or 6-12 months’ interest to break their mortgages early. Or, rather than using normal discounted rates, some use artificially high posted rates (the Big 6 banks, for example) or bond yields in their calculations. These unconventional methods can result in a penalty that’s far more than you ever imagined.

Mortgage Penalty Clarity

Mortgage prepayment calculations have been convoluted for a few decades now. For the average borrower, lenders might as well write their mortgage contracts in Greek.

Regulators finally tried to do something about it in 2013…sort of. The Financial Consumer Agency of Canada (FCAC) asked all federally regulated lenders to create online penalty calculators, and most of them did.

Sadly, most provincially regulated lenders, such as credit unions, have refused to add them.

Another problem with mortgage penalty calculators is that many require excessive data inputs, which may include the:

  1. Interest rate on your mortgage contract (an easy one)
  2. Posted rate at the time you got your mortgage (who the heck remembers that?)
  3. Mortgage term
  4. Payment frequency
  5. Maturity date (or months remaining on your term)
  6. Appropriate comparison rate (i.e., the rate your lender can lend at today, for a similar length of time as that remaining on your mortgage contract)
  7. Current mortgage balance.
Christopher Higashi
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