Understanding Mortgage Payout Penalties 🏡💸

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Most mortgages arranged today are considered to be Closed Mortgages. This means that, technically, you cannot exit the mortgage until the term ends—unless you are willing to pay a penalty to get out early. However, there are some mortgages that you cannot exit unless you sell your house. Additionally, there are Open Mortgages that allow you to pay off the mortgage before the end of the term without incurring a penalty.

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Types of Payout Penalties 📊

There are various types of payout penalties, and it's crucial that the terms of your penalty are clearly defined in your mortgage agreement. If the terms are not clear, I would advise against proceeding with that mortgage. A common statement regarding payout penalties is: “Penalty for full repayment of the mortgage will be the greater of 3 months interest or interest rate differential (IRD) penalty.” Here are some examples of payout penalties based on my experiences.

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Example Scenario for Calculations: 📈

• Mortgage Balance: $350,000

• 2.5 years into a 5-year fixed term at 5%

• Example: 2.74%

3 Months Interest Penalty 💰

• Calculation: Mortgage Balance × Interest Rate × 3 months

• Example: $350,000 × 0.050 × 0.25 = $4,375

Interest Rate Differential (IRD) Penalty 💸

• Calculation: Current Mortgage Balance × Interest Rate Differential × Time Remaining

• Example: $350,000 × 0.0226 × 2.5 = $19,775

• Note: The number 0.0226 is the difference between the current rate of 5% and the rate of 2.74%.

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Based on these calculations, if your mortgage payout penalty is the greater of 3 months interest or IRD, you would pay the higher amount. In this case, $19,775.

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Reducing Your Payout Penalty 📉

There are ways to potentially lower your payout penalty by applying pre-payment privileges to your mortgage before calculating the penalty. While breaking your mortgage can be expensive, I can show you strategies to save hundreds, maybe even thousands, by including the payout penalty in a new mortgage.

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Contact Me for More Information 📞

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