In general, for a fixed mortgage, the penalty is limited to the higher of either three months interest or the differential between the loan rate and the current rate for the remainder of the term of the loan.



YET?there are frequently other circumstances.

Certain lenders (including the large financial institutions) sometimes choose to calculate the difference in rates for the remainder of the loan term in a ?creative manner?. They choose to use the posted rate which is the usually the highest rate instead of using a rate with a discount. This is why you have to ask your lender for an estimate of the penalty.

(NOTE: We want to inform you of this so that you know to be careful and be sure to choose a good lender. Working with an experienced broker can help you place your mortgage application with a lender who uses the best penalty calculation for you.

Different loan products have different penalty calculations:

There are different types of loan products, and each of them has its own sort of penalty:

? Open Mortgage Loan: these are the only loans that do not have a penalty for pre-payment. The kinds of ?line of credit? home loans are often open mortgages.

??Fixed closed mortgage loan: For the most part, the penalty is calculated as the higher of either three months interest or the difference between the original rate and the current rate, for the rest of the term of the loan.

? Fixed closed long term mortgage: For mortgages of 15 years and more, the penalty for

o For the first years of the loan, is the higher of three months interest paymentsor the difference between the contract loan rate and the current loan rate, for the balance of the life of the loan.

o'After five years, it is only three months interest.

? Variable closed mortgage loan: Normally, three months interest but sometimes certain lenders only charge 2 months interest and others insist upon 6 months interest as a penalty.

? Mortgage loan ?5 in 1?: Some lenders favor this type of mortgage; the penalty on a five in one home loan is usually 6 months interest.

Reimbursement of cash rebate

Certain mortgage loans include a cash rebate. Of course, the rate is higher and you must reimburse the amount of the cash rebate equivalent to the number of months between the time you break the mortgage contract and the end of the mortgage term.

Example: Your home loan included a cash rebate of 4% of your mortgage for $200,000, or $8,000. If you repay the mortgage after 30 months (instead of the 60 months for a 5 year mortgage), you must repay a certain portion of this cash rebate. In this case, it is figured as 31/60th of the whole amount, which represents the 31 months difference between the 30th payment and the 60th payment. Therefore, $8,000 X 31, ? 60 = $4,133.33, which will be the amount of the reimbursement of the cash rebate.

You can be sure that this refund will be added to any other penalties, and so your total penalties will be that much more expensive.

You may ask why there is an early payment penalty in the first place.

The vast majority of mortgage lenders market their mortgages in a secondary market in bundles of $100-500million. Investors purchase these mortgages and hope to receive a return on their investment for the complete term of the investment. The lender still administers the payments of the loan.

If a mortgage is paid down before the term is over, no matter how little time is left on the loan, the lending bank will have to administer the contract changes as well as pay off the lenders for the amount of future revenue they are not going to earn now that the loan is paid off. These additional charges are not absorbed by the bank, but are passed onto the borrower in the form of charges and penalties.

Another motive is that lenders want to induce their clients to stay with them. This is a way for them not to lose clients.