5 Tips to Reduce or Avoid Prepayment Penalties
May 4, 2023 | Posted by: Keith Leighton
5 Tips to Reduce or Avoid Prepayment Penalties
Prepayment penalties can cost thousands of dollars. It’s important to know when they apply and how your lender calculates them. If you have an open mortgage, you can make a prepayment or lump-sum payment without paying a penalty.
A prepayment penalty is a fee that your mortgage lender may charge if you:
- pay more than the allowed additional amount toward your mortgage
- break your mortgage contract
- transfer your mortgage to another lender before the end of your term
- pay back your entire mortgage before the end of your term, including when you sell your home
If your lender is a federally regulated financial institution, such as a bank, they must provide certain information. The following details must appear in an information box at the beginning of your mortgage agreement: prepayment privileges, prepayment penalties and other key details.
The way your prepayment penalty is calculated varies from lender to lender. Federally regulated financial institutions, like banks, have a prepayment penalty calculator on their website. You can visit your bank’s website to get an estimate of your cost. Your lender must tell you how they calculate your prepayment penalty and what factors they use to determine the penalty. These details must be clear, simple and not misleading.
Consider the following options to reduce the amount of money you pay in penalties.
Tip #1 Make full use of your prepayment privileges - Make full use of your prepayment privileges every year. Any future prepayment penalties will be based on a lower mortgage balance. Make a lump-sum prepayment before you break your mortgage. Some lenders restrict your ability to prepay if you’re close to the date you break your contract.
Tip #2 Wait until the end of your term to prepay - Consider waiting until the end of your term to prepay if your prepayment penalty will be a large amount. You can then make a lump-sum prepayment without penalty.
Tip #3 Port your mortgage - If you’re buying a new home, ask your lender if you can port your mortgage. This means taking your existing interest rate, terms and conditions with you to your new home. It saves you from breaking your mortgage contract and getting a new one.
Tip #4 Shop around - Shop around when you renew your mortgage. Contact a mortgage broker to check if there are better options that will offer you more flexibility.
Tip #5 Read your mortgage contract carefully - Make sure you understand the details about penalties before you sign your contract. Review your mortgage contract to find out exactly how your lender will calculate your prepayment penalty. Check with your lender for the actual amount. Ask your lender to explain anything you don’t understand.
Don’t forget to contact your DLC Ideal Mortgage expert if you have any questions about your existing home mortgage, or if you are looking to purchase a home or investment property or refinance your existing home. We look forward to serving you today!
