Make sure your mortgage broker knows mortgage penalties

Mortgage brokers should be knowledgeable about prepayment penalties to minimize costs for clients. -Matt Imhoff

• Prepayment penalties can be complicated, requiring knowledge of lender policies and math.

• Prepayment penalties are essentially the lender's return policy for closed-term mortgages.

• Open mortgages have higher interest rates but no prepayment penalties.

• The prepayment penalty for closed variable-rate mortgages is typically three months' interest.

• Fixed-rate mortgages have prepayment penalties based on three months' interest or the Interest Rate Differential (IRD).

• The IRD penalty ensures the lender is compensated for their interest losses when they re-loan the mortgage funds.

• The IRD is always calculated for closed fixed-rate mortgages, even when it is less than three months' interest.

• The interest rate differential can be calculated as the interest to maturity minus the reinvestment interest to maturity.

• Monolines compare the contract rate to actual rates for similar products to calculate the IRD, while banks use posted rates with borrower discounts.

• Lenders have charts to determine the comparable term for reinvestment interest rates.

• The challenge for brokers is knowing how to find the reinvestment interest rate.

“Prepayment penalty policy = the lender’s return policy.”

— Mat Imhoff, Mortgage Broker at Meticulous Mortgages - Mortgage Architects

See the full story here: https://www.canadianmortgagetrends.com/2023/03/why-mortgage-brokers-should-know-prepayment-penalty-calculations-inside-and-out/?fbclid=IwAR3GxWuX2Ez7sPqamUbn4syjqr7AYanqEhbRRP-vuld0unjptZaAMA1mH24

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