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 take the sting out of 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.
For any amount you go over those limits though, you will be charged a prepayment penalty.
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.
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.
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.
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.