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How to Avoid a Hefty Payout Penalty

February 23, 2015 | Posted by Nathan Zacharias | Tagged in

Should you wish to pay off your mortgage early, the lender stands to lose money. In order to recover that money, the lender charges a penalty. These penalties are called interest rate differential charges (IRD), and are used to recompense the lender for lost interest when you close your mortgage early.
Avoiding Payout Penalties

IRDs are the difference between the interest you would have paid over the course of your mortgage and what the lender can earn today on a mortgage of the same size.

You are entitled to make prepayments on your mortgage which will not result in a penalty. Through the prepayment privileges described in your mortgage contract, you’ll know the amount you’re allowed to pay down on a closed mortgage each year without any drawbacks.

These prepayment privileges vary from lender to lender; therefore, you should review your mortgage contract or contact your broker to find out exactly what they are.

In order to avoid paying a hefty payout penalty,there are companies that can aid you in this feat.

Some companies specialize in using market knowledge and resources to reduce your mortgage payout. This will save you hundreds or, in some cases, thousands of dollars.

These companies use their own capital to help you pay as much of the prepayment privileges permitted. This lump sum will reduce your mortgage, thus reducing the extent of your payout penalty. Essentially, you are provided with short-term capital to help lower your payout penalty.

If you don’t want to use the services of a company that specializes in reducing your mortgage payout, there are other ways to help you avoid a hefty payout penalty:

  • Understand your mortgage contract to know exactly what you can prepay yearly. Find out how the penalty is calculated if you have to break your mortgage.
  • There are online IRD calculators you can use, but for a more accurate reading, contact your broker or the financial institution that provides your mortgage. Talk with them and ask them to take your through the calculation steps.
  • Establish when/if you can break your mortgage. Unless you are selling the property, some lenders do not let you break your mortgage at all. This will be a problem is you’re looking to refinance.
  • Take advantage of any prepayment clauses in your mortgage contract. You may have a clause that allows you to pay up to 20% every calendar year without consequence, and may be even increase your mortgage payments by 20% each year.