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For the most part, for fixed loans, the early payment penalty is the higher of three months interest, or the difference between the original interest and new rates of interest, for the remainder of the life of the loan. BUT… it is not always that simple. Certain lenders (even the large financial institutions) will choose to calculate the difference in interest for the remainder of the loan term in a “creative manner”. They decide to use the posted rate which is the usually the highest rate instead of using a rate with a discount. This is why you have to ask your lender for an estimate of the penalty. (NOTE: We want to inform you of this so that you know to be careful and be sure to choose a good lender. Working with an experienced broker will help you place your mortgage application with a lender who uses the best penalty result for you. Different loan products have different penalty calculations: There is a different penalty for the various types of loan products: · Open Mortgage Loan: this is the only type of loan that does not include a penalty for pre- payment. The different types of “line of credit” mortgages are frequently open mortgages. · Fixed closed mortgage loan: The rule for this type of loan is that the penalty is calculated as the higher of either three months interest or the rest of the loan.differential between the contract rate and the current rate, over the life of the · Fixed closed long term mortgage: Mortgages with maturities of 15 years and over, the penalty for o For the first five years of the term, is the higher of either three months interest or the difference between the loan rate and the market rate, for the rest of the balance of the loan. o After five years, it is only three months interest. · Variable closed mortgage loan: Normally, three months interest but it happens that certain lenders only charge 2 months interest and others insist upon 6 months interest as a penalty. · Mortgage loan “5 in 1”: Some lenders prefer this type of mortgage; the penalty on a five in one mortgage is usually 6 months interest. Reimbursement of cash rebate There are some mortgage loans that include a cash rebate. In these cases, don’t be surprised that the rate is higher and that you must pay back the cash rebate equal to the number of months from the time you break the contract to the end of the original mortgage term. Example: You have received a cash rebate of 4% of your mortgage of $200,000, that is, $8,000. You pay off the mortgage thirty months later (on a mortgage term of 5 years, or 60 months). You must repay 31/60ths of the rebate (there are 31 months between the 30th payment and the 60th payment on a total term of 60 months). The calculation is $8,000 times 31, divided by 60, or $4,133.33, to come to the amount of the reimbursement of the cash rebate. And if you are thinking this amount is added to the other penalties, you are right. It can make the total penalties extremely expensive. Why is there an early payment penalty in the first place? The vast majority of mortgage lenders sell their mortgages in a secondary market in bundles of $100-500million. Investors purchase these mortgages and hope to receive a return on their investment for the entire term of the investment. The lender still administers the payments of the loan. When a home loan contract is paid off prior to the end of the term (even if it is only a question of a few weeks before the end of the term), the lender has to oversee the changes to the contract and repay the investors who have purchased the bundle of mortgages for the future revenue which they will now no longer receive because the loan has been repaid. Extra work, therefore charges and a penalty Another motive is that lenders want to induce their clients to stay with them. This is a way for them not to lose clients. Article Source: http://www.articlewheel.com
Gregory is an Accredited Mortgage Professional (AMP). To get more information on mortgage rates - taux hypothèque, please visit: Hypothèques - Mortgage Intelligence
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