What is a prepayment penalty?
Before you pay off your mortgage earlier than originally planned, find out what a prepayment penalty means for you.
Why are mortgages so expensive in Canada?
Created By
Ratehub.ca
A prepayment penalty, also called a prepayment charge or breakage fee, is an amount charged by a Canadian mortgage lender when you pay off your mortgage ahead of schedule, pay more than the amount due, transfer the mortgage to another lender before the end of its term or break the mortgage. How much is a prepayment penalty? Typically in Canada, it is equal to 3 months’ interest on the remaining balance of your mortgage, or the interest rate differential (based on the difference between the mortgage rate in your contract and the lender’s current posted mortgage rate).
“Breaking the mortgage” refers to any change from the originally agreed-upon repayment terms. Prepayment penalties compensate the lender for lost interest payments resulting from the change in your payment schedule.
If you expect to have access to additional funds that might help you pay off your mortgage early—such as an inheritance or an annual bonus from your employer—you may be able to negotiate a prepayment privilege, which permits a certain number or amount of additional payments without incurring prepayment penalties.
Example: “Sierra was surprised by the size of the prepayment penalty when she sold her home and paid off her mortgage early.”
Read more about mortgages:
- Should you break your mortgage?
Breaking your mortgage to get a better interest rate could save you thousands of dollars. Here’s what you should consider before taking that step. - Should you pay off your mortgage early?
There are some serious advantages to paying off your largest debt early. But to make the best choice, first consider your options. - 5 surprises to avoid when switching mortgages before your term ends
Switching your mortgage can save you money—but be careful not to pick an offer that reduces that benefit by hitting you with higher fees and other costs. - Every mortgage calculator you will ever need
How much will your mortgage cost you every month? Can you save money by switching lenders? Mortgage calculators can answer these questions and more.
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