According to Canadian real estate lending experts, "mortgage cancellation fees," also known as "payoff penalties, or pre-payment penalties" are the most difficult among mortgage-related topics, because Canadian law mandates no consistency or single standard for how lending institutions recover the earnings they lose on an early mortgage retirement.
In mortgage lending jargon, "mortgage cancellation" typically is synonymous with "payoff penalty," and it means whatever your lender decides it means as you pay-off your mortgage prior to its maturity. Although your original mortgage documents detail the "cancellation fees" in effect at the time you execute your contract, the lender may-purely at its own discretion-change the terms and conditions of a payoff agreement.
Two standard formulae
Two standard formulae typically apply, and some lenders apply both, stipulating "whichever is the greater of the two." The lender may assess...
Three months' interest penalty-The lenders' guidelines vary from institution to institution as they may take your current interest charges for your next 3 mortgage payments and add them up or they may base the interest calculations on current market rates for one of their fixed terms.
For example, if you currently owe $125,000 and have been paying 7.75% interest (expressed as a decimal, for example 7.75% = 0.0775), apply the formula P=125,000 x (r/12) x 3
Therefore, your penalty equals 125,000 x (0.0775/12) x 3 or 125,000 x 0.0065 x 3 = $2437.50
Interest rate differential - Following this formula, your lender charges you the difference between your interest and the rate at which it currently can lend the same amount, applying this difference to the time you have left until your mortgage matures.
Using essentially the same situation as in the first example and assuming you have two years left on your loan (24 months), and further assuming today's mortgage interest rate is 5%, apply the formula
P=[125,000 x (0.0775 - 0.05) x 24] / 12 Therefore, your penalty equals [125,000 x 2.75% x 24] / 12
Or [125,000 x 0.0275 x 24] / 12 = $6875.00
The lender's prerogative
If the lender invokes its privilege, charging whichever is the larger of the two cancellation fees, then it will assess the $6875.00 penalty. OHMC mortgages apply different standards and formulae according to the date you entered into your mortgage agreement: mortgages registered before July, 1999, have one standard, and those registered after July, 1999, have another. Other lenders may determine current interest rates according to the floating rate in effect at the time of the payout. Moreover, the same lender may apply different standards for different kinds of mort gages; and some lenders strictly prohibit early retirement of a mortgage, regardless of penalties, except in cases of bona fide sales.
Experts very strongly recommend you consult a real estate attorney and work with your lender or an experienced Mortgage Agent as you negotiate the terms of your early repayment. A Mortgage Agent can also give you the benefits of comparative, and money saving calculations between various lenders if you decide you want to move your mortgage or refinance. Not all lenders rates are the same so take the time to find out the best rate to offset any penalties you may have to pay.
Abraham Niyazi - Mortgage Agent Lic#M08010640
Easyrate.ca Centum One Financial Corp - Lic 10758
Cell: 416-993-4082 Toll Free: 1-866-728-3708 x 115
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