If you’re a homeowner in Ontario that suddenly finds themselves in a position where they could or would like to pay off their mortgage early, remember that it’s not that simple! Paying off your mortgage early or ending your mortgage term prematurely for most reasons comes with penalties known as mortgage prepayment charges. These can be pretty significant and are usually difficult to manage when they occur financially.
Before you take the next step in making a mortgage prepayment, it’s best to know what your mortgage prepayment options are and how you can avoid having to pay mortgage prepayment charges entirely.
What is a mortgage prepayment?
A mortgage prepayment occurs when a homeowner that is currently paying off a mortgage in an ongoing term decides to pay a lump sum or all of their remaining balance off. As a result, you are paying your mortgage term earlier (prepaying) than what was agreed to by your lender.
While it might seem like your lender would appreciate you paying off your mortgage earlier than required, the opposite is true. Your lender agrees to finance your mortgage because they earn money off the interest over time. However, by making a mortgage prepayment, they lose out on potential earnings, and prepayment charges are one of the ways that they can recoup.
There are many situations and reasons for which the homeowner might opt to make a mortgage prepayment. However, the most common reason tends to be because they want to pay their mortgage off faster to save on interest charges. However, there are many ways to pay your mortgage faster that won’t mortgage prepayment charges. Let’s go over a few of them next.
Increase the frequency of payments
You can opt to make payments to your lender more often to speed up how fast you pay off your mortgage. For example, if your mortgage payments are monthly, you can talk to your mortgage lender and negotiate a biweekly payment plan instead. Since the interest you pay is calculated based on the remaining amount, making payments faster means you are reducing your owed amount more quickly. This means that even without mortgage prepayments, you reduce the amount of interest you pay in the long run.
Increase the payment amount
Many lenders will allow you to pay up to a certain amount over the requested figure every month for your mortgage payments. While this means you’ll have to pay even more per month, it also means you are reducing both your total principal owed as well as the interest charged per month. The extra amount you can pay will depend on your agreement with the lender, so consult them before considering mortgage prepayment and its associated charges.
Prepay when renewing
While making a mortgage prepayment during your mortgage term is costly, most lenders will allow you to make a generous lump sum payment towards your mortgage between terms when you renew your mortgage. This means that you can make a partial mortgage prepayment without any fees whatsoever between your terms. However, this means that you’ll need to have a significant amount of money saved to make a prepayment when your term is coming to a close.
Make an annual prepayment
In addition to between renewals, mortgage lenders will also allow you to make annual mortgage prepayments at a specific rate. This will depend on what your lender allows, but it is usually anywhere between 10% to 20% of the owed amount. Making these annual payments can significantly reduce the amount of interest you have to pay over the life of your mortgage.
When can you face mortgage prepayment penalties?
There are several different situations in which you may consider making a prepayment or might otherwise incur prepayment penalties.
Renew or refinance your mortgage
Depending on your financial circumstances, you might decide to renew your mortgage early or refinance it for a different rate. Some homeowners may even be looking to renegotiate the length of their mortgage term. In all of these cases, the buyer may opt to do a mortgage prepayment. However, regardless of whether they pay early or not, they will face mortgage prepayment penalties to do so.
Transfer your mortgage
If you want to change your mortgage to another lender mid-term, then expect to pay prepayment penalty fees even if you make a mortgage prepayment to clear the remaining amount due completely.
Prepaying more than your allotted limit
As we discussed before, you can make a mortgage prepayment for an additional amount up to a certain limit allowed by your lender on a monthly and lump sum annual basis. However, if you go over this limit, your lender will charge you prepayment penalties for doing so.
Can a prepayment of mortgage happen without penalties?
There are a few ways in which you can make a mortgage prepayment without paying penalties entirely. Consider the following options if you know you might need to make prepayments towards your mortgage before signing on for a new term.
Choose an open mortgage
By selecting an open mortgage instead of a closed one, you will usually pay higher interest rates on your mortgage term. Still, you will also have the flexibility of making as many mortgage prepayments as you want without any penalties. This can be a great way to get a mortgage term for a short term until you have the funds you need to pay it off quickly.
Assume the seller's mortgage
If you’re buying a house from a seller, you may be able to assume their mortgage – that is, you can take their existing mortgage over with the existing terms and conditions, which means that the mortgage is never broken and you never pay any fees. However, there are strict conditions for this to happen with most lenders, so make sure to check with them early to see if this is an option.
Port your mortgage
Depending on your mortgage lender, you might be able to port or move your mortgage over from your old home to your new one, with all its existing terms and conditions. Generally, this is usually only allowed if the previous home and the new home have the same overall condition, value, and amount owed towards their total. Once again, it’s important to check with your lender to see if it’s possible.
While beneficial to the homeowner, mortgage prepayments usually come attached with strict conditions that can cause you to incur penalties and additional costs if you’re not aware of them. This means that it’s essential to be mindful of what your mortgage agreement with your lender entails before going ahead with making mortgage prepayments. If you’re looking for a mortgage deal that allows you to make mortgage prepayments without problems, contact Mortgage Maestro today to get a quote from our team of experts. We’re sure to find the perfect deal for you!