A mortgage penalty is a fee charged by a lender when you break the terms of your mortgage agreement. This can happen if you pay off your mortgage early, refinance, transfer to another lender, or make payments larger than what your contract allows.
Types of Mortgage Penalties
- 3-month interest penalty: Equal to three months of interest on the remaining balance, often used for variable-rate mortgages.
- Interest Rate Differential (IRD): Applies mainly to fixed-rate mortgages and is based on the difference between your contract rate and current rates for the time remaining.
Why Lenders Charge Penalties
Penalties protect lenders from financial losses when borrowers change the terms of their loan early. They ensure the lender still earns a return close to what was originally agreed upon.
Final Thoughts
Mortgage penalties can be costly, so it’s important to understand your lender’s rules before making changes to your mortgage. Knowing the penalty calculation method helps you avoid surprises and make informed decisions.