1. What is Mortgage Prepayment Penalty?

In Canada, mortgage lenders typically charge a prepayment penalty when you break your mortgage contract before the end of its term. The penalty is the greater of either three months' interest or the interest rate differential (IRD).

2. How Does the Calculator Work?

The calculator uses the standard Canadian mortgage penalty formula:

Where:

• 3 Months Interest = Mortgage Balance × Current Interest Rate ÷ 4
• IRD = Mortgage Balance × (Posted Rate - Current Rate) × (Remaining Term in Months ÷ 12)

Explanation: The penalty protects the lender from financial loss when you break your mortgage early.

3. Importance of Penalty Calculation

Details: Understanding potential penalties helps homeowners make informed decisions about refinancing or selling their property before mortgage maturity.

4. Using the Calculator

Tips: Enter your current mortgage balance, interest rate, remaining term, and the posted rate at the time you signed your mortgage. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why do lenders charge prepayment penalties?
A: Penalties compensate lenders for lost interest income when mortgages are paid off early.

Q2: Are all Canadian mortgages subject to these penalties?
A: Most fixed-rate mortgages have prepayment penalties, but terms vary by lender and mortgage type.

Q3: Can I avoid prepayment penalties?
A: Some lenders allow annual prepayment privileges (typically 10-20% of principal) without penalty.

Q4: How accurate is this calculator?
A: This provides an estimate; actual penalties may vary based on specific lender policies.

Q5: When is the IRD typically higher than 3 months interest?
A: IRD is usually higher when interest rates have dropped significantly since you got your mortgage.