Potential penalties

If the seller does not opt to transfer the mortgage, or is unable to take advantage of this option, a penalty may apply for terminating the mortgage contract before the end of its term. This is known as an early repayment penalty. There is no such penalty for open mortgages.

We are not discussing here the penalty that may apply to an owner who makes additional payments in excess of what is allowed, but only the situation of a property sale.

The amount of the penalty varies from one lending institution to another. However, it is usually based on the following principles:

• For a variable-rate mortgage, the penalty is usually the equivalent of three months’ interest
• For a fixed-rate mortgage, the penalty will normally be the higher of:
  • the sum equivalent to three months’ interest
  • the sum equivalent to the interest rate differential (IRD)

This method is often used when the interest rate in effect at the time of signing the mortgage contract was higher than the rate at the time of termination. Thus the lender calculates the interest it would have received if the signed contract had run its full term. The rate differential is the difference between the rate at the time of termination and the rate at the time the mortgage was entered into.
 

The calculation is as follows:

Mortgage balance X (Annual rate at signing – Annual rate at termination) X remaining term.

Example:
Mortgage balance: $350,000
Rate at signing: 6.5%
Rate at termination: 4%
Remaining term: 24 months
$350,000 X 2.5% X 2 = $17,500