Mortgage Guide: The Cost of Prepayment Penalties

Once you navigate the Windsor real estate market, search through the houses for sale in Windsor, visit some open houses in Windsor with your Windsor REALTOR®, and through all of the Windsor homes for sale you find the right one and close on it. Now it’s time to move in and for every home owner's favourite thing to happen. It is time for the mortgage payments to start. As long as you planned well and purchased within your means, you’ll be able to make your normal payments. Say you save some extra money, get a raise, or have the ability to make some extra payments, we’ve talked all about prepayment penalties and privileges, but today we’ll look directly at the costs of those penalties.

The way your penalty will be calculated will vary depending on the lender. Federally regulated financial institutions, like banks, provide a calculator on their website that you can visit to get an estimate of your cost.

The following factors will affect your cost:

The Amount
- How much you want to prepay (or pay off early)
The Term
- How many months left until the end of your term
Interest Rates
- Used to determine the Interest Rate Differential (IRD)
The Calculation
- The method your lender will use to calculate the cost

Typically, your prepayment penalty will be the higher amount between the amount equal to 3 months’ interest on what you still owe and the interest rate differential (IRD). The lender will usually use the IRD calculation when the interest rate on your mortgage is higher than the current interest rate and if you signed your current mortgage contract less than 5 years ago.

Here is an example of a prepayment penalty:

Assume the following:

An outstanding mortgage balance of $200,000
A current interest rate of 6%
The number of months left in term is 36 months of 5-year term and,
The current posted interest rate for a mortgage with a 36-month term offered by your lender is 4%

The approximate fees to break this mortgage would be,

The amount equal to 3 months’ interest on what you still owe:
- $3,000
IRD:
- $12,000

Therefore, you would have to pay a prepayment penalty of $12,000, which is the higher of the 2 amounts. Don;t forget hidden fees like administration fees you may face.

Here at Jump Realty our agents will give you honest advice on what course of action is best for you in their professional opinion and will always put taking care of your best interests first! With offices in Windsor, Tecumseh, Kingsville, and Chatham, no matter where you are, a Jump agent is ready to help. Please contact us for any housing needs and let us give you a better real estate experience!