How Are Mortgage Penalties Calculated?
Mortgage prepayment penalties depend on the lender, mortgage type and the specific terms of your agreement. Fixed and variable mortgages can use different calculations, and two borrowers with similar mortgage balances can end up with very different penalties.
← Back to Mortgage Strategy QuestionsThe Mortgage Contract and the Lender's Calculation Determine the Penalty.
There is no universal mortgage-penalty formula that produces the same result at every lender. The calculation can depend on whether the mortgage is fixed or variable, the outstanding balance, the time remaining in the term and the lender's specific prepayment provisions.
Mortgage Type
Fixed-rate and variable-rate mortgages can use different prepayment-penalty calculations.
Outstanding Balance
The amount still owing on the mortgage is an important part of most penalty calculations.
Time Remaining
The amount of time left before the mortgage matures can materially affect the cost of paying it out early.
Your Contract Rate
The interest rate on your existing mortgage can form part of the lender's calculation.
Lender Comparison Rate
For some fixed mortgages, the lender compares your existing rate with another rate determined under its mortgage terms.
Lender-Specific Rules
The mortgage contract determines how the lender calculates the penalty, which is why similar mortgages can produce different payout costs.
Fixed Mortgages Can Produce More Complicated Penalties.
Variable-rate mortgages commonly use an interest-based prepayment charge. Fixed-rate mortgages may use the greater of an interest-based calculation or an interest rate differential, depending on the mortgage contract.
An interest rate differential attempts to measure the lender's potential interest loss when the mortgage is paid out before the end of the agreed term. The way that comparison is made can vary by lender.
The prepayment charge commonly uses an interest-based calculation defined by the lender's mortgage terms.
The lender may compare an interest-based penalty with an interest rate differential and apply the amount required under the contract.
The IRD calculation can depend on your mortgage rate, remaining term and the comparison rate used by the lender.
Lender-specific methodology can cause substantially different penalties even when mortgage balances and remaining terms appear similar.
Do Not Make a Refinancing Decision Based on a Penalty Calculator.
An online calculator can provide an estimate, but it may not reproduce the exact methodology in your mortgage contract. If the decision depends on the penalty amount, you need the lender's actual current payout figure.
Posted vs. Discounted Rates
Where applicable, the lender's treatment of posted, discounted or comparison rates can materially affect a fixed-mortgage penalty.
Rates Change
The comparison rate used in a penalty calculation can change, which means the estimated penalty can also change over time.
Prepayment Privileges Matter
Your mortgage may contain prepayment privileges that affect the amount subject to the lender's penalty calculation.
Other Payout Costs May Apply
Discharge, administration or legal costs can be payable in addition to the mortgage prepayment penalty.
Ask for a Current Payout Statement
The lender's payout statement gives you the actual mortgage balance, current penalty and applicable charges for the requested payout date.
Compare the Penalty With the Benefit
Once the actual penalty is known, compare it with the savings or financial improvement created by refinancing, selling or changing the mortgage.
The Only Penalty That Matters Is the One Your Lender Will Actually Charge.
Mortgage penalties can vary significantly by lender and mortgage contract. Before selling, refinancing or switching lenders, obtain a current payout statement and use the actual penalty — not an online estimate — when deciding whether breaking the mortgage makes financial sense.
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