In part one, we discussed how pre-payment penalties can mean huge payouts for people who are selling their homes before their mortgage term is up. So how can you avoid this problem?
Here are some of the most pertinent questions to consider and ask your lender about their penalties.
"If I sell my home and port my mortgage to a new property, how long can I take to close on the new property and still avoid a penalty?"
Some lenders unreasonably require you to close your old and new home on the same day. There are some lenders that will require you to close within 30 to 60 days from old and the new house.
"Can I increase my mortgage amount if I ever upgrade my house without a penalty?"
Most lenders will allow you to increase your mortgage amount without paying a penalty. However, there are two ways that lenders increase the mortgage amount you require.
Some will do a blend and extend; meaning that they will look at the interest rate you currently have compared to the rate that is currently available and they will blend both rates and that will be the interest rate you will have for the new term. The amortization period might increase or remain the same.
Other lenders and mostly done by banks, your current mortgage will remain in place and the additional amount you require they will give you another mortgage with the current interest rate, new amortization period and a new maturity date. The challenge with this is that you will have two different mortgages renewing at different times and with different amortization periods. If you ever decide to move your mortgage to a new lender you will have to pay a penalty regardless as the two mortgages will be renewed at different times. It is always best to explore all your options with a mortgage expert.
"If I break the mortgage early, do I have to pay 'reinvestment fees' on top of the penalty or pay back cash incentives that I have received?"
Yes, some lenders will charge a “reinvestment fee” if the mortgage is paid out in the first three years of the term. And you will have to pay back the cash incentive you have received when you first got your mortgage.
"What term do you use to calculate the nearest comparison rate for an interest rate differential (IRD) penalty?"
Some lenders use a shorter term than the nearest term to your maturity date, which can significantly increase your penalty.
"Is your fixed rate mortgage penalty based on the posted rate, bond yield or discounted rate?"
Some lenders including banks base their penalties on posted rates, which means that this can drastically increase your penalty. Other lenders use the bond yield, which can also cost a lot of money as it depends on the bond market. There are a few lenders that use the posted rates when calculating the simple 3 month interest penalty.
"Can I get out of my fixed mortgage early if I pay a penalty?"
Some “low frills” closed mortgages will not let you out before the maturity no matter what, unless you sell your home.
"If I break the mortgage and stay with you, will you forgive a percentage of my penalty or apply unused prepayment privileges, to reduce my penalty?"
Most lenders will do this in order to keep your business.
"If not, can I have a pre-payment a few weeks before breaking my mortgage to lower the balance used to calculate my penalty?"
Some lenders will not allow any pre-payments 30 to 90 days prior to requesting a payout.
"How long will you honour the quote for your IRD penalty?"
This is critical when you are trying to pay out your fixed-rate mortgage especially if rates are dropping because when they do the falling rates can increase your IRD penalty.
It is critical that borrowers understand the type of mortgage they are getting and the implications that come with pre-payment penalties. The amount of money you pay on penalties can have a huge impact on the equity you end up with when you sell your house. This could drastically affect the purchase of your next property or any financial plans you have with the proceeds from the sale. It is best that you talk to a professional mortgage expert and that you explore all your options. I have had clients that had to pay over $56,000 in penalties when selling their home...
