How are Mortgage Penalties Calculated?
A recent news article about mortgage penalties during Covid-19 sparked lots of conversation on social media, but this issue is not new!
So let’s start by defining Fixed vs Variable Rate Mortgages.
For a Fixed-rate Mortgage, your interest rate is fixed for the length of the term chosen.
For a Variable rate mortgage, your interest rate is based on the Bank of Canada’s Prime lending rate
But the major difference between Fixed vs. Variable Rate Mortgages is prepayment penalties.
Watch our video on how Big Bank Mortgage Penalties work.
Key take-away is that variable-rate mortgages have a guaranteed prepayment penalty of only three months’ interest, compared to the potentially much higher fixed-rate penalties using a complicated interest rate differential calculation.
Another point in favour of choosing a variable-rate mortgage is that interest rates cannot increase randomly. There are eight pre-scheduled Bank of Canada meetings every year to decide whether to move the Prime lending rate or not. The interest rate will not double overnight. In fact, the interest rate is unlikely to move by more than .25% following any given meeting. So...the fear of rate hikes should not drive your decision to lock into a Fixed Rate.
Remember, there are only two ways to avoid paying a mortgage penalty:
1. Pay the mortgage to zero or,
2. The sale of your existing property and the purchase closing date of your new property exactly matches the mortgage maturity date.
YourMortgageYourWay.ca will help you save thousands on your mortgage by matching you with the right mortgage lender for your needs. Our promise is to use simple language, full transparency, and clear communication every step of the way.
Give us a call now and let's do a mortgage review. Cashback mortgages can help you get up to 3% of your mortgage balance back to you. You can use this cash to cover expenses like your legal fees, moving costs, investments, or even pay back your mortgage with a lump sum.
Always remember – it’s best to refinance when your mortgage term is up to avoid penalties.
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