Mortgage News

Mortgage Pay Out Penalties

Okay. You have decided to sell your property OR you want to renegotiate your mortgage with your current or a new lender or Mortgage Broker. What is the first thing you should do?

Call your lender or bank and find out what your pay out penalty will be.

Many lenders will give you two choices:

1. Three months simple interest: This is typically what the home owner has when they have entered into a variable rate mortgage product. You can easily calculate what your payout will be, based on approximately three months payments.

2. Interest Rate Differential or IRD: This is entirely different. Most “Fixed Rate” mortgages offer, IRD or 3 months interest penalties, whichever is greater. This is when you need to call your bank or lender. Many have their own ways of calculating what the penalty will be.

Things to consider:
Most mortgage products come with “pre-payment allowances”. For instance, you are allowed to pre-pay up to 15 or sometimes 20% of the ORIGINAL MORTGAGE AMOUNT once per calendar year. When your lender is calculating your payout amount, they MUST also take into consideration this pre-payment allowance and base the penalty on that amount.

SO: If your original mortgage amount was $200,000, you are entitled to pay off $30,000 penalty free in that calendar year. (based on a 15% pre-payment allowance) Therefore, your penalty should be based on your existing mortgage balance MINUS $30,000.

Make sure you check into this and confirm that this is indeed the case. Back in 2002, RBC had a huge TORT law suit filed on behalf of previous mortgage clients because the bank did NOT do it this way. They subsequently had to repay all of the funds back to the TORT filers.