Many homeowners, especially those who haven’t spoken to a mortgage professional, don’t fully understand mortgage penalties. That’s not a surprise. There are a lot of things to think about when considering a purchase. How you finance your new home—and what the implications are—can vary considerably.

Mortgage penalties are worth looking into and understanding before locking yourself into your mortgage for a period of time. Financing a home can be overwhelming. If you’re considering refinancing, selling, making a lump sum payment, or need a way out, read this first.

What Are Mortgage Penalties?

The most common mortgage penalty people encounter is a prepayment penalty.

Did you know? Your lender doesn’t want their money back early! That’s because they earn guaranteed interest on the loan. This helps them budget and profit.

Below are some common types of prepayment penalties:

Prepayment or Overpayment

If you make a lump sum payment on your mortgage or increase the regular payments by too much, you could be outside the terms of your mortgage agreement.

Transferring

If you move your mortgage to another lender before the end of your term, that is considered breaking the mortgage agreement you made.

Early Re-Payment

If you sell your home and pay off your lender with the proceeds, leaving you without a mortgage, that also breaks the agreement.

Breaking your mortgage for these—or any other reason—almost always results in financial penalties.

What Determines the Size of a Mortgage Penalty?

The amount of the penalty that could be owed will be based on a few factors:

• The amount of pre- or over-payment
• Interest rates (existing and new)
• The type of mortgage (open, closed) and the type of rate (fixed, variable)

How to Reduce or Avoid Prepayment Fees

The simplest answer is to wait until the end of your existing term to make changes. If that’s not possible, review your circumstances:

• Fixed or Variable Rate?
  If you have a variable rate and you’re breaking the mortgage in favour of a fixed option, first check to see if you can lock in a rate under your existing terms.
• Making a Lump-Sum Payment?
  Review the terms of your mortgage to see what your annual prepayment allowance is. Most mortgages will let you make some fixed lump sum payments without any penalties.

Penalties for Non-Payment

There is also a flip side to penalties: incurring fees for late or missed payments.

• Any payment received after the due date will incur a fee.
• Lenders will also report missed payments to the credit bureau, which impacts your credit score.

Tip: Before you miss a payment, notify your lender. You may be able to:

• Defer a payment
• Skip a payment
• Make other arrangements

Some lenders also offer a mortgage payment holiday, allowing you to skip or defer payments for 3–6 months (sometimes longer).

If you’ve already missed a payment, make it up as soon as possible to avoid a quickly escalating situation.

When Paying a Penalty Can Be Worth It

Sometimes paying a penalty makes financial sense. For example:

• If you’re locked into a higher-rate mortgage
• If breaking your mortgage and securing a lower rate saves you more than the penalty costs

Your mortgage professional can run the numbers and help you decide if this is worthwhile.

An Alternative: Open Mortgages

If you’re likely to break your mortgage agreement, consider an open mortgage.

• This is a great short-term solution if you’re expecting an inheritance, planning a move, or anticipating a major life change such as marriage or divorce.
• You can pay it off at any time without penalty.
• The trade-off is higher interest rates compared to closed mortgages.

Whatever type of mortgage penalty you might be facing, my best recommendation is to talk to an expert for advice before making commitments.

Your mortgage professional, lender, or broker can walk you through the fine print and provide advice tailored to your situation. Get in touch with me today, and I can help you with your questions and get you in touch with a mortgage expert in Comox Valley.