When choosing a mortgage lender, the future pay out penalty may have an impact on which lender you prefer.
IRD – Interest Rate Differential
The IRD is basically a penalty amount that lenders can charge if you pay off the mortgage before the renewal date, or pay an amount more than the allowed prepayment privilege. The IRD is based on the amount you are paying out and an interest rate that equals the difference between the original agreed upon rate and the rate the lender can charge today on new money that is borrowed.
3 Months Penalty
The 3 months penalty amount is simply the portion of interest in your monthly payment that you pay in each mortgage payment multiplied by three. The 3 months penalty is usually much lower than the IRD. So, if your total PI payment per month is $1,000 and the interest portion of that payment is $600, you would pay $600 * 3 = $1,800 penalty. Most lenders will charge a 3 months penalty or the IRD, whichever is greater.
Sale Only Clause
A sales only clause is a in a mortgage that enforces it can only be paid out in full if the property is actually sold. If you decide to change lenders mid-term, you will not be allowed to as per the sales only clause. Mortgages that have a sales only clause should only be considered if you know you will NOT be switching mortgage lenders before the maturity date or realize you can not get out of the mortgage unless you actually sell the property. It is also a good idea to determine if the lender charges a 3% penalty, 3 months penalty or the IRD.
3% of Balance
The 3% penalty is actually a 3% of current balance to calculate the penalty. So if your balance at the time you pay out or pre-pay more than the allowed pre-payment privilege amount is $400,000, then the penalty charged would be $400,000 * 3% = $12,000 for the penalty.