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How to avoid (or lower) mortgage prepayment penalties

Posted on: October 07, 2013 | Author: Staff

What you'll need to calculate your prepayment penalty

There are many prepayment penalty calculators out there. In general, you'll need the following information to get an estimate of your prepayment penalty:

    1. Your mortgage start date, or how many months are left in your term.
    2. Your remaining mortgage balance. (If you don't have this information, call your lender.)
    3. Your interest rate type (fixed or variable).
    4. Your current interest rate (if you have a fixed rate).

How ATB’s No Bull Mortgage Rates lower your prepayment penalty

With ATB, your prepayment fees are based on actual market rates rather than an inflated rate that was discounted. In most cases, this makes the Interest Rate Differential (IRD)—that is, the calculation used to determine prepayment penalties—smaller because your current rate isn’t being compared to an inflated rate.

The new IRD is much easier to understand and can save you money on fees paid.

Learn more about No Bull Mortgage Rates

Calculate your prepayment penalty now

 

Download this article as a printable PDF

There are two main types of mortgages out there: open and closed. With an open mortgage, you can make extra payments, pay off your mortgage entirely, or switch lenders at any time. With a closed mortgage, it can be difficult (and expensive) to make those kinds of changes before the end of your term.

Calculate your prepayment penalty now

That's often because of mortgage prepayment restrictions and penalties. These restrictions are explained in the documents you signed when you opened or renewed your mortgage, but those details can be technical and confusing.

If you want to put some extra money towards your mortgage, are planning to buy or sell a home, or simply want to take advantage of a lower interest rate, here are some ways you can avoid paying a prepayment penalty on your closed mortgage.

  1. Know your annual prepayment limits and try to stay below them.

    This is important if you want to pay down your mortgage faster. With most ATB closed mortgages, you can make a lump-sum prepayment (or multiple payments) of up to 20 per cent of your mortgage balance every year. You can also increase your regular payments by 20 per cent annually. With the ATB Rate First mortgage, those prepayment limits are 10 per cent (not 20 per cent).

    For any amount you go over those limits, you will be charged a prepayment penalty.

    Other ways to pay down your mortgage faster

  2. Wait until maturity (when your mortgage term is complete) to make those prepayments.

    When the term for your closed mortgage comes to an end, you can put down as much money as you want—or pay off your mortgage balance completely—without any penalty.

  3. "Port" your mortgage over to your new property.

    This is a good option if you want to sell your home and buy a new one before your closed mortgage term is complete. Instead of closing off one mortgage ahead of schedule and opening a new one, you may be able to carry your existing mortgage—with the same interest rate, loan balance, and maturity date—to your new home. This way, you won't have to pay a prepayment penalty.

    If you need to borrow more money to purchase your new home, you can borrow those funds at a current ATB rate. Your resulting mortgage rate will be blended with your old rate, rounded up to the nearest quarter of a percent.

    Learn more about porting

  4. "Blend and extend" your mortgage when buying, renewing early, or refinancing.

    Blending and extending is similar to porting, but instead of sticking with your current maturity date, you extend your mortgage term. Your resulting interest rate will be a blend of your current rate and your new rate—the exact rate will depend on how much time was left in your original term.

    Learn more about blending and extending

  5. Renew within 90 days of your current mortgage's expiry date.

    If you renew your mortgage earlier, you may have to pay a penalty, so wait until you're three months away from your expiry date to renew.

    Learn more about renewing early

  6. If you're selling your home, have the buyer assume your mortgage.

    If the buyer assumes your mortgage, you won't have to pay off your mortgage early—and thus won't have to pay a prepayment penalty.

By following these tips, you can avoid unexpected prepayment penalties—or lower the prepayment penalty you will need to pay.

Learn more about mortgages

How No Bull Mortgage Rates can lower your prepayment penalty
How are prepayment penalties calculated?
How to pay down your mortgage faster
6 mortgage terms you need to know
Securing a mortgage: collateral versus standard charges
 

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