Today I am here to chat about mortgage penalties. Why I’m getting a lot more questions about mortgage penalties from clients in the past couple of months? What is the normal mortgage penalty range you could expect? Also, will it be worth it for you to cancel your current mortgage, pay the penalty, and get something at today’s lower rate?
1. How come mortgage penalties seem to be coming up in the news?
You may have heard your friends and family talking about this. That’s because interest rates have remained so low for such a long time. Alot of people thought that interest rates were going to be rising back up over the past years and the economic situation just hasn’t allowed for that. Interest rates are still super low and people are finding that it’s a great time to be refinancing or to be switching out your mortgage. If you’ve got a higher interest rate of 4 or 5% and you’re looking at today’s interest rates at 2 or 3% and thinking “why am I paying 2% extra”?
An average mortgage penalty depends on the mortgage that you have. Every bank and lender is different in how they calculate mortgage penalties. They should have explained it to you when you got your mortgage and they should have gone through exactly what your needs are. If you wanted a long term mortgage, they should have explained exactly how the mortgage penalty is calculated, and that it could be a large penalty or if it’s only going to be very small, then you might be in something that’s perfect. If you’re now going to your bank and you’re checking and you’re surprised to find that you’ve got a really large mortgage penalty, something has gone wrong. You shouldn’t be caught off guard like that.
In general, for a variable rate mortgage you might get a 3 month’s interest penalty. So that’s just maybe 1.5 mortgage payments as a sort of a ballpark of what your penalty would be. For a fixed rate mortgage nowadays, it’s usually the interest rate differential, not always, sometimes it’s also the 3 months of interest. The interest rate differential is exactly what the name implies. It’s the difference between your interest rate and the current interest rate. If you’ve got a higher interest rate, you’re basically paying the difference to cancel your mortgage so your penalty could be as small as a couple thousand dollars and as high as 15-18 thousand dollars. Very large penalties could occur.
We did a blog post in the past regarding a poor gentleman who had an incredibly large mortgage penalty, so go back in the archives and look for that if you want to see what the upper limit of this is and be aware when you’re getting a mortgage. When you’re signing it on, exactly what penalties are calculated and if you’re ever going to run into the scenario, if you’re ever going to be susceptible to paying mortgage penalties, maybe you should be looking at a different mortgage product or term.
2. How do you know if your mortgage penalty is worth to pay off?
It’s pretty easy for us to calculate. I do suggest you contact your local mortgage broker to get the proper calculation or call us here at Finder Financial Services because you want to make sure that you’re taking into account the penalty itself as well.
If your penalty is going to be added into your mortgage, so even if you’re paying a lower interest rate, you’re now paying a larger mortgage amount, you’re paying more interest each payment, and each payment is going to be larger because you’re paying an extra 10 or 15 thousand dollars on the total mortgage.
A lot of people forget this. If you go to your bank and they do a comparison, a lot of times, this is missed out and you think that you’re getting a great deal, you’re going to be paying off your mortgage really quick, and your penalty is going to be paid off soon, but a lot of people have completely forgotten to take into account the penalty as well. It’s got to come from somewhere.
If you’re interested in this, just give us a call at 1-866-924-5244. I will be free to do a comparison calculation for you.