Information on Pre-Payments For Your Mortgages
For the majority of mortgages, borrows are charged a penalty if they wish to pay off all or sometimes part of the mortgage before the end of the term. The normal pre-payment penalty is typically the greater of three months' interest or the Interest Rate Differential (IRD: the amount of interest at the mortgage rate vs. the current interest rate due for the balance of the term).
To calculate your IRD penalty do the following:
- Step 1: Review your most recent mortgage statement. Note the interest rate and the time left on the mortgage and the mortgage balance. For example, if you are in a 5-year mortgage that you have been making payments on for 2 years, you will still have 3 years or 36 payments left on the mortgage.
- Step 2: Take your current rate and add 1.5% to it. This is roughly the posted rate at time mortgage issued. Find the current posted rate on a similar mortgage offered by your current lender. Make sure to use the posted rate that most closely matches your remaining term (3 year for our example above). If the rate is higher than your current mortgage rate (plus the 1.5%) no need to go further, the 3 month interest penalty will apply. If the posted rate is lower, continue on.
- Step 3: Take you current rate (with 1.5% added) and subtract your current banks posted rate. This number will provide the interest rate differential (IRD).
- Step 4: Multiply the IRD by the number of years left on the term of your mortgageIn our example it would be 3 years. Then multiply that number by your remaining principle amount on your mortgage. The result will be your IRD penalty.
Please note that most lenders perform the IRD calculations this way but not all lenders do. The single best way to determine you IRD penalty is to call your current lender and ask.
Most mortgage products offer / allow pre-payment privileges including annual lump sum contributions and or an increase in the mortgage payments (up to a certain percent: (5% - 25% depending on the lender)