Homeowners who break a closed mortgage before maturity will often make a pre-payment before the mortgage is discharged.
The idea is to reduce the mortgage balance and thereby pay less of a pre-payment penalty.
It’s a great idea if you have the funds to do it. Remember, however, that lenders have different policies on how close to the payout date you can make a pre-payment.
Some lenders, for example, won’t allow pre-payments to be made within 30 days of the date of discharge (the date you pay off your mortgage in full).
Therefore, if you plan to pre-pay a portion of your mortgage to reduce your penalty, remember to do two things:
- Ask your lender how close to your payout date you can make a pre-payment and still have that payment count towards reducing your penalty. (Allow several days regardless. You don’t want to cut it too close.)
- Make the pre-payment and then confirm that your lender has applied it to your account before your lawyer requests the payout statement. Otherwise, your pre-payment might not reduce your balance for the purposes of penalty calculation.
I have a fully open variable mortgage (Prime-95bp) and I’m considering moving up to a house (& a bigger mortgage) which means I will have to give up my current mortgage and get a new one unless CIBC will extend it…
As a rule what is the minimum pre-payment allowed on Closed mortgages with the maximum discount of the posted rates? Is it the same for fixed and variable rate mortgages?
Thanks
Rob can explain this bettter to you. Usually for Fixed rate – closed mortgage there is no prepayment option other than selling the house. For Fixed rate partially open – the prepayment penalty is usually IRD for the remaining term. All banks have their own ways to calculate that. For variable rate it is usually 3 months Interest.
Might be able to transfer the mortgage onto the new property for the same amount. But the additional new money will come at the current rate offering.
Though perhaps given that it is a fully open this may not apply.
Interesting, would be a shame to lose that rate.
-Ravi Shanghavi, Ottawa
I have found a way to get around from an IRD penalty and only have a 3 month interest penalty….
Sure you have, but I will bite. How?
so your saying that if a applicant has a fixed 10 yr at 5.75 with 5 yrs remaining you can get around the IRD??, IRD in this example is about $15K , sorry man without blending/extending your are incorrect….
Hi JFK,
In your example, yes, the penalty would be three months interest.
https://canadianmortgagetrends.com/canadian_mortgage_trends/interest-rate-differential-ird.html
yes I can.
without some further explaintion how this is done, sorry dont believe you, worked for the bank for over 10yrs….
CIBC should be able to port your rate of prime – 95bps. Unfortunately if you’re adding more money it will probably be at CIBC’s new open rate of prime + 80bps.
You’re better off rolling the whole thing into a new prime + 60bps closed variable.
I didn’t understand your other question about the minimum allowable pre-payment. Sorry.
Thanks Diane.
The 2nd question is how much lump sum payment is allowed without incurring a penalty on closed mortgages
Hi Takloo,
I’ll jump in here. Lump-sum prepayments range from 0-25% annually, depending on the lender and product.
The average is roughly 15%, with the big banks ranging from 10-20%.
Cheers,
Rob
Good advice. It is unbelievably frusterating when you prepay your mortgage and your payout penalty has not reduced since the prepayment was not applied to the balance. Then (if you’re trying to buy another house) you might not have enough for a down payment!