Posted by John Doe
When you sign on the dotted line of a mortgage agreement, you do so with the hope that this transaction will ultimately be very beneficial to you.
In a perfect world, the mortgage contract you have is going to be the best one out there, but the truth is, there’s a chance that a better deal may come along soon enough. When that better deal does come along, your first instinct may be to try to get out of your current deal to secure one more favourable to you, but that’s when you can start to run into trouble.
Mortgage penalties in Canada will suddenly become a problem when you are trying to break free from a previous deal, and if you aren’t prepared or aware of what you need to do next, you may find yourself in a tougher spot than where you started.
What Kinds of Mortgage Penalties Will I Have to Face?
More often than not, the mortgage penalties that will be imposed upon Canadians by banks and other creditors are known as prepayment penalties.
According to the Canadian government, lenders can ask for prepayment penalties under certain conditions. Typically, prepayment penalties can only be sought by lenders if their borrowers agreed to closed mortgage contracts.
Should you decide that you want out of your current mortgage deal, your lender can impose a prepayment penalty. The lender can also ask for that money if you decided that you want to move your mortgage to a different lender before the terms of the current deal have been met.
Plus, lenders can also ask for the payment of mortgage penalties if a borrower paid more than the allotted amount allowed by prepayment privileges and if you borrowed additional money by using your home equity.
Why Mortgage Penalties Can Be Onerous
The amount of your prepayment penalty may be calculated in one of two ways.
First, the lender may decide to base the amount of the prepayment penalty on the amount of three months’ interest on what you still owe. Prepayment penalties based on this calculation can still be elevated, but borrowers will still be aware of what they are in for.
The other way for a prepayment penalty to be calculated is through the usage of what is known as the interest rate differential or IRD. The Canadian government defines the IRD as “the difference between the interest rate on your current mortgage term and today’s interest rate for a term that is the same length as the remaining time left on your current term.”
Here’s the issue with prepayment penalties calculated with the aid of the IRD though, they can both be elevated and incredibly difficult to understand. As noted by Mortgages.ca, rules have not been put in place that will dictate how the IRD should be calculated. Furthermore, lenders don’t really have to be fully transparent with how they use the IRD to come up with the number they will then present to you.
What You Can Do to Become Better Aware of Your Prepayment Penalties
Prevention is always better than a cure, so if you want to avoid being saddled with an enormous mortgage penalty, make sure to understand what kind of agreement you’re getting into first.
You can do this by picking up your contract and going through it carefully. If there is anything there that you are unable to fully grasp, go ahead and ask your lender about it. If you’re still in the dark with regards to how much you may end up needing to pay just to break loose from your current agreement, ask your lender about the exact amount.
Doing those things won’t actually work to reduce the amount you have to pay if your signature is already on the dotted line of the contract, but at the very least, you won’t be blindsided and you’ll be able to adequately prepare for what the lender is going to ask from you.
Tips for Reducing the Amount of Money You’ll Have to Pay for a Penalty
Even in a situation where you are already locked into a mortgage agreement, there are still things you can do reduce the prepayment penalty amount you will have to pay. One thing that Mortgages.ca advises people to do is to review the agreement and see if there is a prepayment clause in there.
The prepayment clause can be extremely helpful to you because it may allow for a lump sum payment accounting for as much as 20 percent of the balance paid, and the best part is that it does not come with a penalty attached. That means you can make the prepayment indicated in the clause and effectively bring down the penalty that will be sought by the lender.
Additionally, MoneySense recommends making it clear to the lender that you are willing to go elsewhere if they will not work with you. Also, feel free to do some shopping around for lenders because there’s always a chance that a better deal can be had elsewhere.
As you can probably tell by now, there is no easy and magical way for you to reduce your mortgage penalties. You can take all the precautionary measures available and do everything in your power to reduce the prepayment penalty and still be left needing to pay a good amount of money.
If you are diligent though, you can surely make the penalty less onerous and easier to pay off.
Just remember that there is no reason for you not to communicate with your lender and get on the same page regarding this troublesome matter of mortgage penalties. By spending the extra time and putting in the additional effort to reach a consensus with your lender, you will find that paying off the penalties will be much easier.
For more information, please call Mortgages, Mortgages at 866-417-8805 or contact us here.