August 23, 2023
Dodging the Bullet: The Impact of Mortgage Penalties and How to Avoid Them
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Manzeel is an award-winning Mortgage Broker and the Owner of the Toronto-based mortgage, Everything Mortgages.
With 16 years of experience in the Canadian mortgage industry and a formal background in mortgage underwriting, Manzeel’s lending expertise gives him unique insight into whether a deal is feasible which empowers his clients to make more informed lending decisions faster.
He has been recognized as one of Canada’s Top 10 Mortgage Brokers by the national Canadian Mortgage Professionals (CMP) Association. Him and his team of 18 mortgage agents are proud to offer a mortgage experience that's built on honesty, trust, and integrity. He prides himself on the brokerage’s dedication to deliver an excellent client experience throughout the entire home loan process from pre-approval to post-funding.
Since moving to Toronto in 1998, Manzeel has successfully launched and scaled several businesses from the ground up, ranging from a mortgage brokerage and a vast real estate investment portfolio to a private financing eCommerce platform. He continues to be a leader in the real estate industry as he uses his analytical expertise to seek new real estate investment opportunities.
As a tech junkie and avid sports enthusiast, when Manzeel’s not working with clients, you can find him reading technology blogs, playing squash or watching tennis with his two boys.
Hey there, future and current homeowners! When you’re living in the excitement of buying a new home or managing your mortgage, it’s easy to overlook certain details. But there are some pitfalls you need to be aware of. In today’s blog, we’ll explore a less-talked-about aspect of mortgages – penalties. We’ll discuss what these penalties are, how they can impact you, and how to steer clear of them.
Understanding Mortgage Penalties
Mortgage penalties come into play under two primary circumstances – early repayment (prepayment) and missed payments.
Prepayment Penalties
Prepayment penalties are charged when you pay off your mortgage before the end of the term. It sounds counterintuitive, doesn’t it? You’re being penalized for paying early! However, lenders count on the interest from your loan for their profits. If you pay off your loan early, they lose out on that anticipated interest.
There are two main types of prepayment penalties – three months’ interest or an Interest Rate Differential (IRD), whichever is higher. The IRD is the difference between your original mortgage interest rate and the rate that the lender can charge today on a mortgage term that is similar in length to the remaining term of your original mortgage.
Missed Payment Penalties
If you miss a mortgage payment or make it late, you could be hit with a penalty. This is usually a percentage of the mortgage payment and can vary depending on your lender and the terms of your agreement.
The Impact of Penalties
The financial implications of mortgage penalties can be significant. They can cost you thousands of dollars, disrupt your budget, and in severe cases, lead to foreclosure if you can’t make up for missed payments.
In addition to the financial hit, missed payments can negatively impact your credit score, making it more challenging to secure loans in the future.
While mortgage penalties can be troublesome, the good news is that they can often be avoided. Here’s how:
Understand Your Mortgage Agreement
Your best defense against penalties is understanding your mortgage agreement. Be clear about the terms and conditions, especially the sections about prepayments and late or missed payments. If you’re not sure, ask your mortgage broker for clarification.
Make Use of Prepayment Privileges
Many mortgages come with prepayment privileges, which allow you to pay a certain amount of your mortgage principal each year without incurring a penalty. This could be a percentage of your original or current mortgage amount or a fixed dollar amount.
Create a Buffer
Life is unpredictable, and financial hiccups can happen. To protect against missed payments, build a buffer into your budget for unexpected expenses or changes in income.
Refinance or Port Your Mortgage
If you need to break your mortgage due to a move or for a lower interest rate, consider refinancing or porting your mortgage. Refinancing allows you to change the terms of your mortgage, while porting lets you transfer your current mortgage to a new property.
Dealing with Mortgage Penalties
If you find yourself facing a mortgage penalty, don’t panic. Speak with your lender or mortgage broker about your options. They may be able to provide a solution or offer advice tailored to your situation.
In conclusion, while mortgage penalties can be an unwelcome surprise, they don’t have to be a nightmare. By understanding your mortgage agreement, making smart payment decisions, and seeking professional advice, you can navigate your mortgage journey smoothly. As always, the team at Everything Mortgages is here to guide you through every step of the way.
At Everything Mortgages, we strive to help first-time homebuyers, small business owners, and hardworking professionals navigate their mortgage journeys. Whether it’s securing a loan or seeking better solutions, our team is here to guide you toward becoming mortgage-free sooner and building wealth faster. Reach out to us today to explore these strategies and more.
Note: This article is intended for informational purposes only and does not constitute financial advice. Please consult a financial advisor or mortgage professional before making decisions about your mortgage.
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