Payout Penalties

Too often payout penalties seem to get skipped or poorly explained in the mortgage setup process.  This happens at banks and with some brokers.

The financing period becomes a fairly rushed time for people and while the focus is on rates, term, amortization, and prepayment privileges, the discussion of payout penalties seems to be gone over too fast.   Often you’ll hear the payout penalty is the greater of 3 months interest or the interest rate differential (difference in what your rate or discount is and what the lender can re-lend their money at time of payout) which is pretty standard in the industry on closed mortgages.

Now it is standard to have a payout penalty if you break your closed contract, but it’s not standard on the rate or discount rate that lenders use to compute the interest rate differential.    Instead of using your actual interest rate say, 2.99%, they may use what they deem to be the discount they gave you (posted 4.99%- your rate 2.99%= 2.00%).   2% of the balance for the remaining term can be huge compared to using the 2.99% rate you got – 2.94% rate they can re-lend (difference of .05%).

Statistics say 50% of people will do something with their mortgage within 4 years.   Payout penalties can be a huge factor in future decisions you can make with your property/mortgage.    Make sure to take the time to ask the banker or lender about this and possibly show you the lender calculations used.

– Narish