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22 Mar

Prepayment Penalties: Banks Vs Monoline Lenders


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Simply stated, if you pay your mortgage off before the end of your term, you’re going to face a ‘prepayment penalty’. But there’s nothing straightforward about how that penalty is calculated when you compare banks and monoline lenders.

Monolines are dedicated mortgage lenders. While lenders such as banks and credit unions provide an assortment of financial products and services in addition to offering mortgage financing, monolines solely concentrate on mortgages. The term ‘mono’ literally means one, as in a singular focus.

Monoline lenders follow the same rules as Canadian banks, and actually help keep mortgage pricing competitive.

Most fixed-rate mortgages have a prepayment penalty that is the higher of three months’ worth of interest or the interest rate differential (IRD). IRD is based on: 1) The amount that is being prepaid; and, 2) An interest rate that equals the difference between the original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of the mortgage.

Penalty calculations can vary drastically

When selecting a mortgage, it’s important to ask upfront about prepayment penalties. Let’s face it – life happens. A lot can change over a five-year period, or whatever term you select for your mortgage. If you have to break your mortgage contract before your term expires, it’s nice to know it won’t cost you a fortune to do so.

Your penalty amount will be larger the farther away you are from your renewal date.

Here’s a Monoline Vs Bank comparison example of how penalties are calculated:

I can help you decide if paying out your mortgage early makes sense for your specific situation.

Have questions about payout penalties or your mortgage in general? Answers are just a call or email away!

*The postings on this site contain my own views and don’t necessarily represent the company’s positions, strategies or opinions.