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Mortgage Contracts – A Must Read

April 9, 2013


Should the need arise to terminate your mortgage early, the Mortgage Payout Penalty may be one of the largest surprises in the contract. Most early mortgage payout penalties are either 1) three (3) months interest or the Interest Rate Differential, whichever is greater.

If you are paying off your mortgage before the maturity date, most  financial institutions charge three months interest.  This means if you have a balance of $210,000  and a rate of 6.29% you will pay:

$210,000.00 x 6.29% = $1,100.75 per month x 3 months= $3,302.25

However if there is a significant difference between your rate and the current rate, your lender may use the interest rate differential to calculate your rate. You were smart to educate yourself and get a great rate. However most financial institutions use current posted rates on the day you signed rather than negotiated rates to calculate your penalty.

Since the posted rate when you got your mortgage was 7.79% , you negotiated 6.29% and  current rates are 4.79%, combined with your 5 years remaining of a 10 year mortgage,  the differential you will pay is :

$210,000 x (7.79% – 4.79%) 3% x 60 months (5 years) =$31,500 which is 9.53 times as much as three months interest.

As a banks primary goal is profit, guess which one you are going to be charged. Now had you had included using your negotiated rates rather than posted rates, the penalty would have been 1/2 of that or $15,750. This is one of the items in the mortgage contract that may be negotiable. If you don’t ask, the answer is always “No”

Every bank /financial institution uses a different system to calculate penalties. When you are in negotiations, find out what system your lender will use should you want or need to pay out your mortgage early. Do your best to get the lowest payout possible and make sure that it is carried into your new contract if and when you renew.

Many lenders will revert to standard clauses when you renew and it is in your interest to watch for this kind of change-up. Even though the wording may be similar to what it was, make sure you are clear on the meaning because the difference can be costly. Make sure you get a Mortgage Payout signed by your lender to ensure that there are no misinterpretations on your part.

The banks spend a lot of money on training their loans officers. Whether you have a short time to the end of your term or you just started, we have well trained long term industry professionals that may be able help you with a financial plan to save you years of payments and reduce the pain should you need to terminate your mortgage early.

Contact me ~ 250.766.2106 or ~ for a cost free obligation free consultation to see if we can help you pay the bank less.

  1. This is a topic that is near to my heart… Many thanks!
    Exactly where are your contact details though?

    • My contact details are at the end of the post.
      Contact me ~ 250.766.2106 or ~ for a cost free obligation free consultation to see if we can help you pay the bank less.

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