Someone recently asked if I could describe the various penalties associated with breaking a mortgage prior to the maturity date.
Generally speaking, lenders usually use a 3 month interest penalty, or an Interest Rate Differential penalty (IRD). The penalty for breaking a fixed rate mortgage is usually the greater of 3 months interest, or the IRD (in some cases when it is very close to maturity, the 3 month interest penalty will be higher, but otherwise the IRD penalty is much higher than 3 months interest).
Variable rate mortgages usually use the 3 month interest penalty. Some variable mortgages offering lower rates, however, will use an IRD or, in some instances, are closed (you cannot break them) without a bona fide sale of the property. This is also the case for some niche fixed rate mortgage products.
It is in the IRD penalty where there can be vast differences from one lender to another.
The IRD penalty is based on 3 things:
Your Mortgage Penalty Was How Much??
By: Daniel Lewczuk
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