When you sign a mortgage for a period of, say, five years, you’re, in essence, signing a contract with your mortgage company for that same period of time. When you break a mortgage early, it’s like breaking a contract and you’ll be subject to what’s called an early pay-out penalty.
Most mortgages will have one of two versions of that pre-payment penalty; either a three-month interest penalty, which is equivalent to three months of your regular mortgage payment interest; or what’s commonly referred to as an IRD (interest rate differential) penalty. And that IRD penalty is a much larger number in most cases because it is the difference between the contract rate that you signed for originally and what today’s rates are. That can be a big difference as we’ve seen before in Canada.
As most mortgage companies, banks, and credit unions all will calculate those penalties differently depending on their own policies and procedures, it’s important to sit down with your Castle Mortgage specialist review the details of each individual mortgage product that interests you. It’s important to ensure that the penalty calculation is spelled out completely for you, so that there are no surprises down the road if you decided to pay off your mortgage ahead of schedule.