If you sell your house or refinance your mortgage loan before the end of the term, the financial institution that has granted the loan could impose a mortgage penalty, that is to say you will have to pay additional fees. The mortgage penalty depends on the loan type you have contracted as well as the interest rate. Even though paying additional fees seems like a disadvantage, it could turn out to be a good thing for you.
Above all, it is the loan type that you have that will determine if you will have to pay a mortgage penalty or not. An open mortgage allows you to repay or refinance your mortgage at any time, which means you will not have any penalty if you do so before the end of the term.
It is only if you have a closed mortgage that you will have additional fees to repay or refinance your mortgage the mortgage maturity date.
The value of the mortgage penalty to pay is determined by the current interest rate of the loan. For a fixed rate, it could be three months of interest on the reimbursed amount or the interest rate differential between the one established in the contract and the posted rate of the bank or the private mortgage lender at the time of the reimbursement. You should know that you will always pay the highest amount, so it is preferable to get information about how to calculate the penalty.
For the variable rate, financial institutions generally apply a penalty corresponding to three months of interest.
At first sight, paying a mortgage penalty is a disadvantage when you want to repay or refinance your mortgage loan. In fact, it means that you have to pay additional fees that could represent a few hundreds of dollars, thus reducing your profits for a property sale.
However, it could be beneficial to pay this penalty if your goal is to refinance your mortgage loan with a lower interest rate. On long term, you will save money and will recover the amount paid in penalty fees.
For example, let’s assume that you have contracted a private loan to buy your house, because your credit score did not allow you to request a loan with a traditional financial institution. After two years, you have recovered your credit score, and you think about making a new request with a bank, whose interest rate is much lower than with your private mortgage financing.
Since this loan will only come to its term in a year, it is possible that the lender of the first loan requires penalty fees. You still choose to refinance, as it will allow you to save on your monthly payments.
At Clic Hypothèque, it is what we are proposing to do: offering you a private mortgage with a competitive interest rate, when traditional banks refuse to grant you a loan. We are aiming to help you to recover your credit score, and we will even help you to obtain a new loan with a bank when your situation will be restored.