North Vancouver Mortgage Holder Clobbered By Scotiabank
Nothing brings up consumer hackles more than the topic of mortgage prepayment penalties. Simply put this means paying out your mortgage in full before the agreed term has elapsed. At face value it seems simple enough, most banks will ding you either three months interest on the outstanding balance or will use whats called an IRD. Below is an extract from actual Scotia Bank mortgage documents to help clarify what their pre-payment policy is:
"During the closed period, the cost to pay off some or, the entire principal amount of your mortgage is the higher of (A) or (B), Plus a reinvestment fee. That fee is dependent on the length of time you have had the mortgage.
(A) Three months interest cost at the mortgage rate on the amount you want to repay
(B) The Interest Rate Differential. This means the difference between your existing mortgage interest rate and the interest rate currently charged for a mortgage similar to yours for the remaining term of the loan. (This is a mortgage which has a term that is next shortest to the remaining term of your existing mortgage. The cost is calculated on the amount you wish to repay.).
If you pay off your mortgage within the first year afterthe interest adjustment date, the reinvestment fee is $500. In the second year the fee is $400 and $300 in the third year. There is no reinvestment fee if you have had the mortgage for more than 3 years."
I'm not trying to make you fearful of banks prepayment penalties as you have two perfectly viable options to avoid them altogether. One is to take a shorter term mortgage so the commitmentis less or you could look at an open mortgage product if you feel you might want to sell or completely pay back the mortgage in the near future. Also keep in mind that most banks do offer generous pre-payment privilegesduring most longer term mortgages.
The key here is to understand whatyour options aregoing in. There is no substitute for sound planning (and running a few what if scenarios) before deciding what contractual commitments you should make.
Check out this story on CBC highlighting what happens when things go wrong.
