WHAT IS A PRE-PAYMENT PENALTY?
When you sign up for a mortgage agreement, you decide on the term of your mortgage. There are many choices ranging from 1-10 years. In Canada, the most popular term is the 5-year term.
Statistics prove that 60% of Canadians in a 5-year term brake their mortgage at an average of the 36-month mark, triggering a pre-payment penalty.
What triggers this penalty?
A sale of the home, refinancing to consolidate debts, pulling equity from the home, renewing into a better rate are all actions that would trigger a pre-payment penalty midterm.
The pre-payment penalties vary from lender to lender so it’s important you understand the penalties before you sign as there is a 60% chance you will pay this penalty. (Assuming you choose the 5-year term)
Variable Mortgage – 3 months interest
Fixed Mortgage – the greater of 3 months interest or the Interest Rate Differential (IRD) calculation.
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