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Mortgage PrepaymentSad Home owner

Discussing mortgage penalties upon cancellation.

It may be easier to get a mortgage than to get out of one. First you have to understand the situation when it may happen. Also note that the situations discussed here are not necessarily followed by all banks. So, it is in your best interest to check with your financial institution—how much penalty you have to pay.
Let us assume a scenario where you have to move because you got a job. So, life has to move on. You have to go to a different place and you have to sell the house and have to close the mortgage. It may also happen that the interest rate at present is very low and you really want to get out of my 5yrs fixed rate mortgage and get the benefit of the very low interest rate.

You can have a few different types of mortgage.

  1. Closed mortgage — fixed or variable rate—fixed or variable payment. In the case of closed mortgage it is most of the time not possible to prepay the mortgage without selling it to an arms length buyer.
  2. Partially closed mortgage — all the same as above except you can prepay the mortgage by paying a penalty. In some cases you can prepay the mortgage after a certain time period (3yrs normally) by paying some penalty.
  3. Open mortgage — normally variable rate mortgage. No prepayment penalty applied except some admin and legal charges.


If you are stuck with a closed mortgage then you shall be in trouble if you want to prepay the loan before the term ends. The penalty can really be a painful experience. You always have to see that the benefits outweigh the loss. In some case cases, such as the selling of the property due to separation it may not be possible.

There are two types of penalties. The higher of them will apply.

  1. Three month’s interest on current mortgage
  2. Interest rate differential (IRD)
  3. In addition to those above, the institution or lender may charge some other fees—
    • Administration fee.
    • Any Cash back money prorated.
    • Any discount on the rate initially.
    • Any other benefits the bank may have paid.
    • Remember: for variable rate mortgage most of the time there is no IRD payment.

Three month’s interest on current mortgage:– This is simple. They will simply charge the three months interest.

Interest rate differential:-This is the tough one. Even the lenders sometimes are confused about what the present interest rate should be. They usually use some calculation to figure out how much interest rate they would get if they lend this money today. Then they look at the difference between them. Then they charge the difference on the remaining term on the outstanding principle. That can sometimes be really nasty. It is a good idea to contact the lender to find out the exact amount.

DIY excel formula

the figure shows how to calculate an approximate IRD by yourself using excel. Financial Consumer Agency of Canada has a nice web page explaining this

Financial Consumer Agency of Canada has a nice explanation on this subject. They also offer some tools to calculate the numbers.

A few Canadian banks now offer penalty calculator on their web site.

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Sudip Adhikari.
Agent License #M10001082
Broker Mortgage Diligent -
Head Office -1305 Matheson Blvd East, Mississauga, ON L4W 1R1
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