Most lenders charge an early payout penalty on closed mortgages if the debt is paid prior to the maturity of the term. The lending institution must describe the penalty they could charge on the mortgage document.

The most common penalty is:

The greater of three months interest penalty OR the interest rate differential.

In other words, whichever amount is the larger of these two figures will be your penalty.

Other kinds of penalties are listed below.


Three Months Interest Penalty

Paying off your mortgage before the maturity date, most lending institutions charge three months interest penalty (or an interest differential penalty).

Your present mortgage balance is multiplied by your current interest rate and multiplied by three.

Interest Rate Differential

This is the difference between the interest rate on your mortgage contract compared to the rate at which the lending institution can re-lend the money.

Example:

If your mortgage has a balance of $150,000 at 7%, you have 3 years left to go and the current 2 year mortgage rate is 5%. Then the lending institution will charge:

$150,000 X 36 months X 2% (7% - 5%) = $9,000


Other Penalty Calculations

Methods of calculating penalties are as varied as the lenders' imaginations! The following outline describes some penalties charged by lenders.

Some examples:-

v      Greater of three months interest penalty OR the interest rate differential.

v      CMHC mortgages registered prior to July 1999 - during the first three years, the penalty is the greater of 3 months interest OR interest rate differential. After three years of payments made on a 4 or 5 year term (or longer) the penalty is three months interest.

v      CMHC mortgages registered after July 1999 - CMHC mortgages will now have the same penalty clause as the institution lending you the mortgage funds.

v      Two months penalty interest (based on the floating rate in effect at the time of payout) calculated on the outstanding balance during the first three years of the term and no penalty charged at all for the remaining years of the term.

v      The mortgage can not be paid out unless there is an arm's length sale - then the penalty is 3% of the outstanding mortgage balance.

v      The mortgage can not be paid out unless there is an arm's length sale - then the penalty is the greater of three months interest OR 3% of the outstanding balance.

v      Same as above, but not more than three months interest in years 4 and 5 of a five year term.

v      For non-arm's length sales - it is the greater of three months interest OR interest rate differential to the bond rate for the remaining term.

v      For arm's length sales - it is the greater of three months interest OR interest rate differential to the current posted mortgage rate for remaining term.