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Know Thy Penalty

Photo of a Referee - Penalty If there’s any chance you’ll break your mortgage before its term is up, know what kind of penalty you’ll be slapped with.

A lot of people never bother to look into it. They’re usually either apathetic or they don’t envision breaking their mortgage.

In reality, people exit mortgages early all the time. They do it to take out equity / consolidate debt, sell the property, get a better rate, apply a windfall lump-sum pre-payment, add a readvanceable line of credit, or even get divorced.

These and other reasons help explain why the average 5-year fixed mortgage lasts just 3.5 years.

In any case, penalties usually come in two flavours:

IRD penalties are usually the more heinous of the two, and their calculation methods often differ by lender. (Here’s a story to that effect by the Globe).

The Globe cites an example where a lender’s use of posted rates in its IRD formula costs thousands more than a lender which uses discounted rates.

If you’re not sure how your lender’s IRD penalty is computed, ask your mortgage planner or banker to explain it with an example.

Another thing you can do is search Google for that lender’s “standard charge terms.” The penalties are usually explained there.

Here’s a sample IRD explanation from BMO’s standard charge terms: