How Mortgage Penalty Is Calculated In Canada

For most home buyers shopping for a mortgage, interest rate is the most important aspect of the process. However, it’s important to look past mortgage rates and also consider penalty rates. While no one plans to break their mortgage, there are many reasons you may have to in the future and it’s smart to plan for all possibilities.

Unforeseeable circumstances such as divorce, a move, a change in finance, or other personal circumstances may mean that you can’t complete your mortgage term. It’s important to plan for the possibility that you may not be able to see your term through right from the beginning, or you may get hit with a huge penalty. When discussing your mortgage, either with a bank or mortgage broker firm, make sure you ask about the process of breaking a mortgage, and the penalties involved.

Mortgage penalty is calculated using the interest rate differential. Typically, the penalty is calculated by taking the greater of three months interest on the remaining balance, or the interest for the remainder of the term on the remaining balance. There’s little point in trying to save a couple dollars a month on a low interest rate, if you end up getting hit with thousands in penalty rates for having to break your mortgage. Looking ahead to all possibilities can help you be prepared in the face of unexpected costs, and avoid any nasty surprises.


Something to consider as well when it comes to mortgage penalties is the difference between a fixed and variable rate mortgage. Fixed rate mortgages tend to have higher penalties than variable rate mortgages. It’s worth visiting a mortgage broker firm and discussing these options, as it can be overwhelming to research it all on your own.

When searching for lower penalty rates, it’s all about the lender. Smaller mortgage broker firms tend to offer better penalty rates than the larger ones, or banks. Even though it may be the last thing on your mind when shopping for a mortgage, planning ahead for the possibility of breaking your mortgage can save you thousands of dollars.

At Northwood Mortgage, our mortgage professionals work hard to find you the lowest and best mortgages rates and terms. Mortgage shopping can be difficult, especially for the first-time home buyers, and there are so many factors to consider. Our mortgage experts can help you navigate the tricky world of mortgage shopping, and find you the best mortgage for your needs. Contact us today to set up a meeting.

source: northwoodmortgage.com

Can I Get Out Of My Mortgage Without A Penalty?

There are many reasons you may need to break a mortgage. Life is unpredictable, and perhaps a five year closed mortgage seemed like the right choice at the time, but as we all know circumstances can change. Maybe you need to sell earlier than you thought, or maybe you found a cheaper rate somewhere else. Unfortunately, getting out of a closed mortgage can result in paying a penalty fee, and these can cost thousands, or even tens of thousands of dollars.

Protect Yourself From The Beginning

When it comes to signing a mortgage, the language that’s used in the documents can be complicated and difficult to understand, especially for an inexperienced buyer. In this way, you can get stuck paying penalties larger than you expected, or not being able to get out of the mortgage at all.

Though it can seem daunting, it’s worth learning how to read legal documents. When it comes to your mortgage, or anything involving substantial amounts of money, it’s imperative that you know exactly what you’re agreeing to. Even if you use a lawyer to go over these documents with you, don’t completely let them take the reins. You should understand every detail of what you’re signing, and you should be able to use these details to foresee any future issues.

It’s useful to calculate mortgage penalties before you find yourself in a position where you have to get out of your mortgage. The more prepared you can be, the better.

How Do I Calculate Penalties?

There are online penalty calculators available, but it is recommended that you calculate the penalty yourself so you know what you should be paying.

There are two methods you can use to calculate what you will be paying, but whichever of the two is higher is the one you should be prepared to pay.

• Three Months’ Interest: Your next three mortgage payments plus interest.
• Interest Rate Differential: The current rate of however many years you have left on your mortgage, subtracted from your original rate and multiplied by your mortgage balance.

Using these methods you can easily calculate what your penalty should be. Again, do this in advance, so you can plan ahead before it becomes an emergency.

By ensuring you understand the agreement you’re entering into, and calculating possible penalties you can stay on top of your mortgage and avoid unpleasant surprises. While you can’t exactly get out of a mortgage penalty-free, you can take steps to make sure you’re not paying any more than you have to.

source: northwoodmortgage.com