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

What Is A Variable Rate Mortgage?

When mortgage shopping, many buyers think that a fixed rate mortgage is the only way to go. However, a variable rate mortgage may actually save buyers money in the long run, although it can be riskier. Here’s how variable rate mortgages work:

 As opposed to a fixed rate mortgage, which is a flat rate paid throughout the mortgage term, without fluctuating interest fees, a variable rate mortgage is based on lender prime rates, and will fluctuate with the bank’s interest rates. If you are considering a variable rate mortgage, it’s best to speak to a mortgage expert as they will have a thorough understanding of the current interest environment.

While a fixed rate mortgage allows for better financial planning and eliminates the chance of any surprise, there are some reasons why a variable rate mortgage may be a better option. For one, if you know the lender’s rates are currently low, and you’re planning to only own the property for a short time, a variable rate mortgage may help you save money. Other possible perks of variable rate mortgages include:

    -If interest rates are expected to fall, you could capitalize on that in the future.

    -More flexibility: The penalty and extra interest fees are much harsher on a fixed rate mortgage if the mortgage is broken. The interest will be less on a variable rate mortgage.

    -Although it’s not without risk, variable rate mortgages have been proven to save Canadians money over time.

    -With a fixed rate mortgage, your payment won’t change even if interest rates drop significantly.

There is really only one risk to variable rate mortgages, which is the risk that interest rates will rise suddenly. This is, however, unlikely, as banks will try to avoid raising rates in order to avoid public backlash.

If you are considering a variable rate mortgage, you should be able to still cover your payments should there be a raise in interest rates. If you are able to afford the risk, then a variable rate mortgage can definitely save you money. If interest rates are currently low, and you want greater flexibility with your mortgage, then a variable rate mortgage can give you that.

Since there is risk and more complexity involved with a variable rate mortgage, it’s important to seek out the advice of mortgage experts to guide you in the right direction. Northwood Mortgage can help you with all your mortgage needs, whether you choose a fixed or variable rate mortgage. Contact us today with any questions about how we can help you, or apply now!

source: northwoodmortgage.com