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Pre-Payment Privileges
Piazza Pretoria

Pre-Payment Privileges and Penalties

Life is a Variable. Know Your Options.

Pre-Payment Penalties and Privileges

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When it comes to your mortgage, flexibility is key. Life is unpredictable, and your mortgage should adapt to your changing needs. Let me walk you through the various options and costs that can come with your mortgage.

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Embracing Change

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Every mortgage product comes with its own set of terms and conditions. However, life can throw unexpected curveballs your way, prompting you to review your mortgage terms. You might find yourself wanting to:

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  1. Adjust your payment frequency

  2. Increase your payments periodically or skip one

  3. Make a lump sum payment on your principal

  4. Make significant changes to your mortgage, like switching to a different rate type, refinancing, or changing lenders

  5. Pay off your mortgage early

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Having these options at your disposal is invaluable. Still, lenders are keen on safeguarding their income source, which is, of course, your mortgage loan and the interest it generates. Consequently, some changes might come with associated costs.

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Types of Mortgage Products

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Lenders offer various mortgage products, each with different levels of payment flexibility:

  • Open-Term Mortgage: These offer extensive flexibility, allowing you to change your payments, pay off your mortgage, or switch lenders with ease. However, they typically come with higher variable interest rates.

  • Closed-Term Mortgage: Most homeowners opt for this type. It locks you into a specific rate and term for a defined period, usually around five years. Closed-term mortgages offer lower rates but have more restrictions and penalties.

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Pre-Payment Privileges

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Your mortgage should provide certain pre-payment privileges that enable you to manage your finances effectively:

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  1. Increased Monthly Payments: Many lenders allow you to increase your monthly mortgage payment by a certain percentage (typically from 5% to 100%) or even double up on payments a few times per year.

  2. Lump Sum Pre-Payments: You can often make a larger payment on your mortgage every year, usually a percentage of your principal amount, which can range from 5% to 20%.

  3. Payment Schedule Flexibility: Some lenders permit you to switch from a monthly payment schedule to a bi-weekly or accelerated bi-weekly schedule, helping you pay down your principal faster.

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Pre-Payment Penalties

Should you wish to make changes to your mortgage, such as paying it off early, exiting the mortgage before the end of your term, or making significant alterations, you may incur penalties. These penalties, along with administrative fees (e.g., legal, appraisal, title, tax, discharge fees), could be costly. The type and amount of penalty depend on your mortgage terms:

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  • Early Payoff Penalty: If you decide to pay off your entire mortgage before the end of your term, you may be charged a percentage of the overall unpaid principal balance.

  • Three Months of Interest: Exiting a variable-rate mortgage typically incurs a penalty equivalent to three months of interest.

  • Interest Rate Differential (IRD): For fixed-rate mortgages, lenders may charge either three months of interest or the IRD, whichever is greater. The IRD is calculated as the difference between your original mortgage interest rate and the current rate, applied to the remaining term of your mortgage.

  • Restrictive Terms: Mortgages with very restrictive terms can impose higher-than-usual costs for any changes, be it a shift in payment frequency, increased down payment, or selling your home.

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Beware of Bargain-Bin Rates

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Mortgages offering ultra-low rates may seem appealing but can ultimately cost you more if you anticipate making changes in the future. These mortgages might trap you with restrictive conditions or impose higher penalties for alterations. It's crucial to carefully consider your future needs when selecting a mortgage product.

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Calculating Your IRD Penalty

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To calculate your IRD penalty (or consult with us for personalized calculations):

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Step 1: Review your most recent mortgage statement to note your interest rate, remaining term, and remaining balance.

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Step 2: Add 1.5% to your current rate. This represents the posted rate at the time of your mortgage issuance. Find today's posted rate for a similar mortgage offered by your lender. If this rate is higher than your mortgage rate plus the 1.5%, you will incur a 3-month interest penalty. If it's lower, proceed to Step 3.

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Step 3: Subtract your current mortgage rate (with 1.5% added) from your lender's current posted rate for a similar term. This provides the IRD.

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Step 4: Multiply the IRD by the number of years left in your mortgage term, then by your remaining principal balance. The result is your IRD penalty.

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Keep in mind that while most lenders use this method to calculate IRD penalties, there may be variations. It's advisable to contact your lender or reach out to us for precise penalty calculations and a comprehensive understanding of your mortgage terms.

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Your Mortgage Journey

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Over the course of your mortgage term, a lot can change in your life. Whether you're considering adjustments, refinancing, or planning to switch lenders, I'm here to help you explore the most flexible options that align with your unique needs. At MortgagePal, I specialize in simplifying the mortgage process and finding you the most suitable solutions.

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If you're buying your first home, I can secure you a flexible mortgage right from the start, ensuring you get the best rate available based on your qualifications and saving you a considerable sum. Don't hesitate to reach out for top-notch mortgage service and expert guidance. Your mortgage experience should be smooth and tailored to your preferences.

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5589 Byrne Rd #227, Burnaby, BC V5J 3J1

We're dedicated to securing the most favorable mortgage rate for you. Your eligibility for a competitive rate is influenced by specific factors, including your credit score and home equity, in accordance with Canadian regulations. Discover your personalized rate swiftly, and rest assured. Lic. 503774

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