Friday, March 9, 2018 / by Ruth Ballantyne
Beware: Mortgage penalty can be a terrible shock
I have come across quite a few people who have wanted to sell their home recently. Unfortunately many of them got quite a shock when we went through the numbers to identify their “NET”.
Most lenders charge an early redemption penalty on closed mortgages if it is paid off prior to the end of the term. This penalty would be outlined in the mortgage documents received from the bank when the mortgage was registered. Much of the surprise stemmed from the notion that the discharge penalty to get out of their current mortgage would be three months interest. When people tell me this I immediately tell them to check with their bank or allow me to submit a mortgage verification form to the bank before listing the house for sale because all too often it is not the case. Today with interest rates at a record low and with the amount of refinancing that has taken place in the past few years people are finding themselves in situations where the penalties are often $10,000 to $15,000 or even more depending on the balance of the mortgage and the length of the term left on the mortgage. Many of the people I have talked to don’t want to sell their house, they need to sell the house and are dumbfounded when they find out that all of their equity is eroded by the bank’s discharge penalty.
So what is the real penalty if not three months interest? Most lenders calculate this penalty as three months interest or the interest rate differential, whichever is more. Three months interest equals outstanding balance times current rate divide 12 times 3. The interest rate differential is usually the difference in the rate you currently have on your mortgage and the current posted (not discounted) rate the lender is offering or the rate at which the lender can re-lend the money for the rest of your current term. Interest rate differential equals out- standing balance times (mortgage rate – current rate) times number of months left 12 on the mortgage. This is a simplified example for calculating your penalty.
Some financial institutions calculate it differently so you should always check with your bank for the correct method. So you can see that this may have a mate- rial effect on your net proceeds.
If you have a large penalty and have not checked this with the bank prior to listing and selling your home you may find your- self short for the plans you have made. Your realtor can help with this by having you sign a Mortgage Verification document. This document will allow the bank to release your privileged information to the sales representative so that you will have the details of your discharge penalty in writing, prior to selling your home. You want to be able to plan your future with confidence.
This editorial was published in the Brampton Guardian on February 3, 2010 http://zoominlocal.com/ml-brampton-guardian/2010/02/03/#?article=747275