Pre-payment penalty, WHAT?!! - Dominion Lending Centres NasaKasa

Pre-payment penalty, WHAT?!!

You might be wondering what a pre-payment penalty is?

Yes, you read that correctly. A pre-payment penalty is a penalty the banks charge mortgagors for paying off their mortgage before the end of the term. If you pay your mortgage off partly or in whole, the lender will charge you a pre-payment penalty. Pre-payment penalties can be calculated in one of two ways. For fixed-rate closed term mortgages, the lender will use the greater of 3 months interest on the amount you have pre-paid or the interest rate differential. For a variable rate, mortgage lenders would use the three months’ interest.

A pre-payment penalty is something you want to be aware of before signing your mortgage contract. Depending on your wants and needs, you may opt for a variable mortgage to avoid worrying about hefty interest rate differential penalties. So if you are planning on buying a home, doing a quick renovation, and selling it, you should also be very mindful of the pre-payment penalty. You’ll want to choose a mortgage broker that will have your best interest at heart. They will be able to show you all the options that will best suit your individual needs.

If you’re considering refinancing your mortgage, breaking it early, or pre-paying a considerable amount to pay it off faster, there are a few factors to consider. Many homeowners are obsessed with obtaining the best rates to save them the most money when it comes to mortgages. On the other hand, people frequently underestimate the significance of the pre-payment rights and penalties that come with the mortgage and lender of choice. Understanding these facts is critical to prevent unfavourable consequences if you decide to modify your mortgage before the term expires.

Now, why do lenders charge pre-payment penalties? That is the way the lenders protect themselves from losing money from lost interest. Essentially the lenders are insuring themselves. Say you are in the third year of your five-year term. You decide to refinance your mortgage to get a better interest rate; the bank will charge you a pre-payment penalty because if you stayed, they would continue to make money off the interest they were charging. That is a way to either keep someone at the bank because the penalty is too significant or get some money they would have made from the borrower.

These are all things an experienced mortgage broker can teach you to avoid getting into a commitment that is not the right fit.

If you plan to get into a new mortgage commitment, let us help guide you through the fine print. You can reach us at 905-997-7001 or email us at to begin your home buying journey.