As notaries, we sometimes must be the bearer of bad news. Often, this happens during the course of a sale, where we must tell someone who is selling their home that they are going to receive less money than they were expecting. This can be for a variety of reasons, such as strata fines or mortgage pre-payment penalties. The latter can be sometimes be particularly devastating.
Sellers of real estate are usually prepared to pay commissions to the realtors and legal fees, but seldomly think about their mortgage and whether an early payout will trigger pre-payment penalties. Timing the sale of your home so that it does not trigger pre-payment penalties could potentially save you thousands of dollars.
If your interest rate is a variable rate, then your pre-payment penalty will most likely be equal to 3 months of interest. If your interest rate is fixed, then your penalty will either be 3 months of interest or will be determined by the “interest rate differential”, which is a calculation that compares your interest rate to the bank’s current posted rate. It is the latter that often catches people off guard, as it can sometimes be substantial. We have seen many clients pay penalties in the thousands. We once had a client pay just over $40,000!
If you are thinking of selling or have already accepted an offer on your home, we recommend that you contact your lender to find out what the pre-payment penalty will be, and if the amount of the penalty is expected to change in the near future. At the very least, you can be financially (and emotionally) prepared for the pre-payment penalty.