Many Seller's are now getting hit with some large Mortgage Payout Penalties. It is now more important than ever that they very this information along with their Realtor what their penalties will be if they are not porting their mortgage to their new home. Unfortunately with mortgage interest rates continuing to fall, most penalties are now calculated on the interest rate differential / loss of interest.
This is because most mortgage early payout penalties are calculated on three months interest payment or the interest rate differential—whichever is the GREATEST!!
How to Calculate a Mortgage Interest Rate Differential Penalty
Methods of calculating penalties are as varied as the lenders' imaginations. As a Seller or a Realtor, always remember:
- Do not assume the same lender charges penalties the same way for each type of mortgage.
- Do not assume the penalty charges you agreed to with the original mortgage document are the same when you renew with the same lender. Policies concerning penalty charges are always changing.
- Do not assume the same wording means the same calculation with different lenders. For example the term "interest rate differential" means very different penalty policies for different lenders. The terminology is not used consistently throughout the industry.
- Do not assume your legal representative and the Realtor, is familiar with all the constantly changing different 'twists and turns' of penalty charges.
This is a brief condensed explanation of the difference between 3 month and interest differential penalties.
Three Months Interest Penalty:
If you are paying off your mortgage before the maturity date most lending institutions charge three Months interest penalty. This is calculated by taking the current mortgage balance and multiplying it by your current interest rate and multiplied by three months. For example:
If your mortgage has a balance of $250,000.00 at an interest rate of 6.95% and you have 4 years left then the lending institution will probably charge a mortgage early payout penalty calculated as follows:
$250,000.00 X 6.95% ($1737.50) X 3 months = $5212.50.
Interest Rate Differential Penalty:
This usually means the difference between the interest rate on your mortgage contract compared to the current rate at which the lending institution can re-lend the money to someone else. In the same example as above using this method:
If your mortgage has a balance of $250,000.00 at 6.95% and you have 4 years left to go and the current 4 year mortgage rate is 3.95% then the lending institution will probably charge a mortgage early payout penalty calculated as follows:
$250,000.00 X 48 months X 3% (6.95%-3.95%) = $29,064.84. this is 5.5 times the amount of the three months interest penalty.
As you can see by the two above comparisons there is a large difference in the amount of the penalty being paid by the seller. This is why it is imperative that you get a "Mortgage Verification" signed by the bank and not calculate it yourself or take Realtor's word it that they know your payout figure. Realtors should not give advise on payout penalties since the regulations and how they're calculated differs so much from one lending institution to another.
How to Decrease Your Risk of a Penalty
The best way to decrease your risk of penalty is to carefully review the mortgage documents before signing them and don't be afraid to ask a lawyer for help uncovering answers to your particular questions. Some mortgages have prepayment clauses that allow for a specific percentage of the mortgage balance to be prepaid in a calendar year and will reduce your penalty. Lastly, if you're purchasing another property, you may be able to port your mortgage rather than closing it and opening a new one for the new property. When you port your mortgage, you'll bring your current rate and terms and transfer them to the new property. The holder of your mortgage will have to approve the transaction, and in most cases, the transactions must be done at the same time or within a small window of time.
Justin Havre is the top producing REALTOR® with RE/MAX First, Canada's very first RE/MAX brokerage. Calgary real estate is his passion; Justin specializes in Southwest & Northwest Calgary homes for sale. He can be reached at 403.217.0003 or contacted through this site.