Pre-Payment Penalties and Privileges

What options do you actually have with your mortgage?

Gained access to cash flow? If you want to pay off your mortgage early, or plunk down extra money as you go — lenders have rules to help or hinder. We'll expose your costs and the fine print. Better yet, we'll find a better mortgage that fits your financial goals.

The right mortgage fit can make a difference to pay down — or pay off — your mortgage.

Every mortgage comes with terms that you sign onto, and lenders will either allow or make you pay for any changes along the way. And because a home mortgage is likely the largest loan you'll face in your lifetime, it's good to have options.

What happens if you get an influx of cash? Or, maybe you want to (slowly) pay off your mortgage faster? Putting more down seems like a really great idea, as these amounts go directly to your principal. That means your mortgage loan balance will be paid off earlier AND you'll save interest.

But, there can be a number of factors to uncover or keep in mind, to ensure that your strategy to save money on your mortgage doesn't end up costing more.

Will the terms of your current mortgage allow extra payments?

Lenders want to protect their source of income (your mortgage loan and the interest you pay), which makes sense, because they were there to help you get your home or property with a rather substantial loan. Each lender will have different mortgage products, often tied to rates, that will determine your payment flexibility.

  • An open-term mortgage means you have almost limitless flexibility in increasing payments or paying out your mortgage, but comes with higher rates.
  • A closed-term mortgage offers lower rates, but more restrictions and penalties. Most Canadian home owners have this type of mortgage.
  • A variable-rate mortgage offers less pre-payment penalties, but carries more risk if rates go higher.
  • A fixed-rate mortgage carries more penalties, but lower risk, as your rate is locked in.
  • Many lenders allow a certain percentage of increased payments or lump-sums every year of your term.
  • Ultra-low-rate mortgages can come with the most restrictions and highest costs for pre-payments (called a restricted mortgage), especially if there's a bona-fide sales clause attached.

At True North Mortgage, our friendly, expert brokers will quickly help you figure out the fine print, and even suggest a better mortgage fit through a refinance or a switch at renewal time, if you need it.

Buying your first home? We'll get you a flexible mortgage right off the start, at your best rate (that you qualify for) to save a pile of cash.

What pre-payments privileges do you have?

  • Increase your monthly payments. Often, there will be an allowable increase on your monthly mortgage payment from 5% up to 100% (the latter means you can double up on a monthly payment). Or, lenders will allow a double-up payment only a few times per year.
  • Lump sum pre-payment. Every year of your term, lenders may permit you to make a larger payment on your mortgage, usually a small percentage of your principal amount (varies by lender).
  • Payment schedule flexibility. You may be able to switch from a monthly payment schedule to a bi-weekly or accelerated bi-weekly schedule, which will speed up the amount you put down on your principal ahead of interest charges.

Check with your lender for your pre-payment options. Or, we can check for you, at no cost or obligation. That way, we can also provide you with payment modelling for different scenarios, so that you can see how the numbers line up with your mortgage goals. And if you want something different in a mortgage, we can quickly start the process to find the best mortgage product that fits your needs.

When would pre-payment penalties come into play?

If before the end of your current term, you want to get out of your mortgage, pay a large amount down, or pay it off entirely, you may be charged costly penalties, along with admin fees (such as legal, appraisal, title, tax and discharge fees).

  • Early payoff penalty may apply if you decide to pay off the entire mortgage all at once, especially before the end of your term. It's usually charged as a percentage of the overall unpaid principal balance.
  • 3 months interest is typically charged for exiting a variable-rate mortgage.
  • Interest Rate Differential (IRD) comes into play for fixed-rate mortgages. Lenders will charge whichever is greater, 3-months interest or the IRD. The IRD is calculated as the difference between your original mortgage interest rate and the current interest rate, applied to the amount of your remaining term of mortgage (lenders may calculate the IRD differently).

Open-term mortgages have the most flexibility with no penalties for payout, though some admin fees may apply.

Here's how to calculate your IRD penalty (or talk to us for the numbers magic):

  • Step 1: Review your most recent mortgage statement. Note the interest rate and the time left on your mortgage, and your mortgage balance. For example, if you've put in 2 years of payments on a 5-year mortgage, you'll still have 3 years (36 payments) left on your mortgage.
  • Step 2: Take your current rate and add 1.5%. This is roughly the posted rate at the time your mortgage was issued. Then find today's posted rate on a similar mortgage that is currently offered by your lender. Make sure to use the posted rate that most closely matches your remaining term (3 years, for our example). If the current posted rate is higher than your mortgage rate including the 1.5%, no need to go further — the 3-month interest penalty will apply. If the posted rate is lower, continue to Step 3.
  • Step 3: Take your current rate (with 1.5% added) and subtract your current bank's 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 mortgage term (for our example, 3 years). Then multiply that number by your remaining principal 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. Contact your lender directly to determine your exact IRD penalty, or we can help — we deal with all lenders, and can pull the numbers for you.

A lot can happen over a mortgage term. Talk to us to get your best options. And, get spot-on advice to pay off your mortgage faster.

What do you need? We're at your service.