When a prepayment penalty may apply
A closed mortgage may charge a penalty when the borrower pays more than the permitted amount, pays out the full balance, refinances or transfers the mortgage before the end of the term. The lender may call it a prepayment charge or breakage cost.
Open mortgages generally provide more repayment flexibility, but they may carry a higher interest rate than a comparable closed mortgage.
How penalties are commonly calculated
Variable-rate closed mortgages are often based on a number of months of interest, while fixed-rate closed mortgages may use the greater of a months-interest calculation or an interest-rate-differential calculation. The exact formula depends on the lender and contract.
Request a written penalty quote with an expiry date. The amount may change as the mortgage balance, remaining term and comparison rates change.
Calculate the break-even point
Add the penalty, discharge fee, legal costs, appraisal cost and any new-lender fee. Then compare those costs with the interest savings and payment difference over the remaining term. A refinance may still make sense for reasons such as debt consolidation, but the cost should be visible.
Do not rely on the new monthly payment alone. Extending the amortization can reduce the payment while increasing total interest.
Ways the existing contract may help
Review the annual lump-sum privilege, payment-increase option, portability and whether the mortgage can be blended with a new amount. These features may reduce the need to break the mortgage.
Before making a large payment or listing the property, ask the lender how the penalty is calculated and what steps may reduce it within the contract.
Mortgage options depend on the borrower, property, documents and current lender guidelines. A general article cannot replace a complete application review.
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