Mortgage Penalties: What They Are and How to Avoid Them
- Rachel Cousins
- May 22
- 2 min read
If you're considering refinancing, selling your home, or making a large payment on your mortgage, it's important to understand the potential costs involved—especially when it comes to mortgage penalties.
As a mortgage broker, I often speak with homeowners who are caught off guard by these charges. Whether you're in Nanaimo, the Lower Mainland, or anywhere else in B.C., knowing what to expect—and how to plan ahead—can save you time, stress, and money.
What Is a Mortgage Penalty?
A mortgage penalty is a fee your lender may charge if you break the terms of your mortgage contract. This typically happens when you:
Refinance before your term ends
Sell your home and pay off the mortgage early
Transfer your mortgage to another lender
Make a lump sum payment beyond your annual allowance
These penalties exist because lenders count on the interest you agreed to pay over the term. Paying off your mortgage early reduces their earnings, which is why they often charge a fee to compensate.
How Is the Penalty Calculated?
The exact amount depends on several factors, including:
Whether your mortgage is fixed or variable
Current market interest rates
How much time is left in your term
The size of the payment you're making
In general, variable-rate mortgages tend to have lower penalties (often three months’ interest), while fixed-rate mortgages may be subject to what's called the Interest Rate Differential (IRD), which can be more significant.
Ways to Reduce or Avoid Penalties
Here are a few strategies that may help:
Wait until your term ends before making changes to your mortgage.
Use your annual lump sum prepayment privileges—most mortgages allow for a certain percentage to be paid without penalty each year.
Speak to your lender in advance if you're facing a hardship or planning a move. Options like deferrals or skipped payments may be available.
If flexibility is key, consider an open mortgage—these allow you to pay off your mortgage anytime without penalty, though they typically come with higher interest rates.
When Paying a Penalty Might Make Sense
There are times when breaking your mortgage, despite the penalty, could be worth it. For example, if interest rates have dropped significantly since you locked in, the long-term savings on a lower rate may outweigh the cost of the penalty. I regularly help clients run the numbers to determine if it's financially worthwhile.
Let’s Review Your Options Together
Mortgage penalties can be frustrating, especially if you weren’t expecting them. The good news is that with proper guidance, you can make an informed decision that works for you and your financial goals.
If you're considering any mortgage changes, let’s talk. I’ll help you understand your contract, weigh your options, and make sure there are no surprises along the way.
Rita & Rachel Cousins
Mortgage Brokers | Mortgage Architects
Proudly serving Nanaimo, Parksville, Port Alberni, Duncan & the Lower Mainland
📞 604.230.9206
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