The answer is pretty simple…a dramatic decrease in interest rates. This means most mortgage holders are locked into higher rates. This means higher penalties to break the mortgage. (Keep in mind you are ‘breaking a contract’ – that’s why they call it ‘Penalties”)
Fixed-rate closed mortgage holders must pay three months of interest or make up the difference in the interest rate (whichever is greater) as their penalty for breaking the mortgage before the end of the term. Depending on the length of time outstanding on the mortgage term, the fixed interest rate, and the amount outstanding, the mortgage prepayment penalty can easily get into the $5,000 to $10,000 range. Each Lender may have a different way of making the calculations but generally it is an interest rate differential between the current rates and the fixed rate you’re locked into.
The difference between your mortgage’s fixed rate and the posted interest rate for the term closest to the number of months left on your mortgage. They also take into account the amount of discount you originally received when the mortgage was given.
So what can be done to minimize costs? One way is to ensure that you make a lump sum prepayment before you payout the mortgage. Some lenders allow as much as 25% of the original mortgage amount to be paid down without penalty. Even if you have to borrow off other sources of financing for a short period of time, this is an effective way to basically get rid of 25% of the prepayment penalty.
Another way is to consider porting the mortgage to the new house. Not all mortgage providers will offer this option, but if they do, its definitely something to consider.
In the case of a debt consolidation, you might also be able to get a mortgage increase with a blend in rate. Under this strategy, the lender blends the old rate on the old mortgage funds with the new lower rate associated with the incremental funds. The result is an interest rate that is somewhere between today’s low rate and your current mortgage rate.
It’s important for homeowners to evaluate their situations with a mortgage expert. Most consultations are free; this should be less than the cost of trying to figure it out alone and get hit with a hefty surprise on closing.
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel