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What You Need to Know about Fixed Rate Mortgage Penalties in 2017

What You Need to Know about Fixed Rate Mortgage Penalties in 2017

Fixed Rate Mortgage Penalties

In the mortgage industry fixed rates are quite popular amongst homebuyers. The reason for this is that borrowers know what to expect for the term of their mortgage. A fixed-rate terms provides a certain guarantee of what the loan will cost over the entire term. Variable-rate mortgage are a bit more risky. Generally speaking, your interest rate can fluctuate by going up or down, which affects how much you actually pay back on the money borrowed.

In Canada, breaking a closed or fixed mortgage before the term is up can come at a high cost, but most homeowners don’t know this. If you’re like any other homebuyer you’re shopping around for the best mortgage rates in hopes of saving money in the long run. Don’t overlook the penalties that might be attached to your mortgage loan agreement and understand how closed/fixed mortgages work.

Fixed Mortgages – How Do They Work?

With a fixed mortgage, comes a fixed borrowing cost and a fixed term. Each mortgage requires a mortgage agreement or contract that stipulates the terms of the loan agreement, which you as the borrower must abide by.

However, if you want to pay your mortgage off early, or switch to another lender for a better rate, you may also have to pay an interest rate differential (IRD). The IRD measures the interest rate gap between your current lender and your new lender. Therefore, your current lender won’t receive this money from you any longer since you’ve ended your agreement early.

Mortgages Penalties – How Are They Determined?

As previously mentioned, breaking your fixed-rate mortgage comes with a penalty. The prepayment penalty for ending this type of mortgage term early is generally either:

  • 3 months of interest your outstanding mortgage balance
  • 3 months of interest on your IRD

Whichever is greater.

Other Penalty Considerations

If you’ve mortgage through a bank, you may have received a fixed-rate mortgage that is actually better that the posted rate. However, should you choose to end the term early, the bank might remove any discount and calculate your IRD at a higher rate. Unfortunately, there is really nothing that can be done about this. Therefore, always ask how this penalty is calculated. If the mortgage is on a non-discount rate, then it’s not the right fit for you.

At any time, when in doubt call your local neighborhood mortgage broker. We can answer all of your questions about potential penalties or any other mortgage concerns.

Contact Mortgage Alliance to know more details about Fixed Rate Mortgage!

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