Good news about higher rates…. it means lower prepayment penalties.

If you tried to break your fixed rate mortgage or refinance in the last 16 months, then you probably found out the hard way the Big Six Banks and many other mortgage lenders (bu not all) calculate the penalty in one of two ways….

3 months interest penalty or Interest Rate Differential (IRD).   Most mortgages fell into the IRD category… how does this work?  Each Bank seems to have their own formula and I could find only one that posts the formula online….. TD Canada Trust’s formula is similar to most Banks…  I’ll give TD Canada Trust credit for posting this calculator online….at least borrowers can go here and figure out the cost of early prepayment… take a few moments and calculate how much your penalty would be…

Here’s an example:  $250,000 with 3 years remaining at 5.50% and where the branch gave you a 1.25% discount at the time the mortgage was first arranged…equals a penalty of $14,250. That’s equal to 12 months interest.…. Try the calculator yourself to see what your penalty would be….

The good news is that as interest rates climb it now becomes worth looking at getting out of the higher fixed rate mortgage products…..(probably a great time to be looking at variable rate mortgage with rates as low as 1.70%)