How To Save On Mortgage Penalities (hypotheque)

By Author: Gregory van Duyse
Total Articles: 9
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It can be even worse

In general, for a fixed loan, the penalty is limited to the higher of either three months interest or the differential between the loan rate and the current rate for the remainder of the term of the loan.

YETthere are frequently other circumstances.

Certain lenders (even the large financial institutions) sometimes choose to calculate the difference in rates for the remainder of the loan term in a creative manner. They decide to use the posted rate which is the usually the highest rate instead of using a rate with a discount. It is for this reason that you have to ask your lender for an estimate of the penalty.

(NOTE: We want to let you know about this so that you know to be careful and be sure to choose a good lender. Working with an experienced broker can help you place your mortgage application with a lender who uses the best penalty calculation for you.

Different penalties for different products:

There are different kinds of loan products, and each of them has its own sort of penalty:

· Open Mortgage Loan: this is the only type of loan that does not ...
... include a penalty for pre- payment. The various types of line of credit mortgages are frequently open mortgages.
· Fixed closed mortgage loan: As a rule, the higher of either three months interest or the difference between the loan rate and the market rate, for the balance of the term of the loan.
· Fixed closed long term mortgage: Home loans that have maturities of over 15 years
o For the initial five years of the loan period, is the higher of either three months interest or the differential between the original rate and the current rate, for the balance of the loan period.
o After five years, it is only three months interest.
· Variable closed mortgage loan: As a rule, three months interest but some lenders only charge two months interest and there are others who may charge as high as six months interest for a penalty.
· Mortgage loan 5 in 1: This is offered by some mortgage lenders. The penalty is usually 6 months interest.

Reimbursement of cash rebate

Certain home loans include a cash rebate. Of course, the rate is higher and you must reimburse the amount of the cash rebate equivalent to the number of months between the time you break the home loan contract and the end of the mortgage term.

Example: Your mortgage included a cash rebate of 4% of your mortgage for $200,000, or $8,000. If you pay off the mortgage after 30 months (instead of the 60 months for a 5 year mortgage), you must repay a certain portion of this cash rebate. In this case, it is figured as 31/60th of the whole amount, which corresponds to the 31 months difference between the 30th payment and the 60th payment. Therefore, $8,000 X 31, ÷ 60 = $4,133.33, and that will be the amount of the reimbursement of the cash rebate.

Of course, this refund will be added to any other penalties, and so your total penalties will be that much more expensive.

Why is there a penalty for early payment?

Most mortgage lenders sell the mortgages they generate in what is called the secondary market. Groups of home loans are bundled together into groups of $100 million to $500 million and sold off to investors, who have the intentionof earning their return for the entire life of the loans. The lending institution still handles the administration of the loan.

If a mortgage is paid off before the term is over, regardless of how little time is left on the loan, the lending bank will have to take care of the contract changes as well as pay off the lenders for the amount of future revenue they are not going to earn now that the loan is paid off. These costs are not absorbed by the bank, but are passed onto the borrower in the form of charges and penalties.

There is an additional reason for these penalties and charges. Lenders don't want to lose clients, so they will make it expensive for you to walk away from your loan.