Mortgage penalties are a fact of life for mortgage holders. When it comes time to sell your house or refinance your mortgage you’ll rarely find yourself near your renewal date. Mortgage penalties are not always a bad thing though. They can be associated with the better option, especially if you are breaking your term to get a better mortgage rate. After all, it’s about saving money over the life of your mortgage. Having said all that, the lower the penalty the better
The standard Mortgage penalty is the greater of 3 months interest or the interest rate differential (IRD) so for a $300,000 mortgage at a 3.29% mortgage rate you’re looking at a $2,467.50 penalty in today’s interest rate environment. Now that you’ve decided to pay the penalty, let’s look at how you can reduce it! One loophole mortgage lenders don’t tell you about is that you can use your pre payment privilege at the time of pay-out. If you have a 20% lump sum privilege then you can pay $60,000 with no penalty reducing your overall penalty to $1,974.00.
Some lenders have eliminated this loophole by adding a clause stating that you can’t use your privilege payment after a discharge request has been made. Others have made it more onerous by requiring two separate cheques, one for the lump sum and one for the pay-out. When faced with your mortgage penalty make sure you ask your mortgage lender to reduce your penalty by the privilege payment. It’s free to ask.