As a Burnaby notary public specializing in real estate conveyance, I often help sellers or borrowers who are selling their property, refinancing or switching their mortgage to another bank. They are surprised to learn that paying out their mortgage early can trigger a mortgage prepayment penalty. This penalty, also called a prepayment charge, can be thousands of dollars and is charged when your payout date does not exactly match the maturity date of your mortgage term.
If you are planning to pay off your mortgage early, there are ways to reduce or even avoid this penalty. Here are ten strategies to consider before you list your property or decide on a refinance date.
1. Align the Completion Date or Funding Date with Your Mortgage Maturity or Renewal Date
If possible, set your completion date or funding date to match the day your mortgage term ends or renews. Lenders usually do not charge a penalty when the mortgage term naturally expires. Having said that, it is prudent to confirm with your bank to determine whether you should instruct them to renew into an open term as your mortgage is usually paid off between 1-3 business days from the completion date or funding date, depending on whether a payout option is available locally.
2. Use Your Prepayment Privilege Before the Sale or Mortgage Refinance/Switch
Many mortgages allow a lump-sum annual prepayment, often 10 to 20 percent of the original principal, without penalty. Making this payment before selling can lower the remaining balance and reduce the penalty. Keep in mind that some lenders allow prepayments anytime and some only prepayment on normal payment dates.
3. Port Your Mortgage to Your Next Property
If you are buying another home, ask your lender about porting your existing mortgage. This transfers your current mortgage to the new property without triggering a payout penalty.
4. Negotiate with Your Lender
If you are taking out a new mortgage with the same lender, they may be willing to reduce or waive the penalty to keep your business.
5. Sell During an Open Prepayment Period
Some mortgages allow full repayment without penalty during an open window near the end of the term or on specific anniversary dates. Check your mortgage contract to see if this applies to you.
6. Switch to an Open Mortgage Before Selling
If you know you will be selling soon, converting your closed mortgage to an open mortgage can allow you to pay it off without penalty. While open mortgages usually have higher interest rates, this short-term cost may still be lower than the penalty.
7. Watch for Interest Rate Changes
If your penalty is based on the interest rate differential (IRD), rising interest rates can lower the penalty amount. Timing your sale after such a shift may save you money. If your penalty is based on three months of interest, paying out after Prime rate is expected to drop (or conversely, payout before Prime rate is expected to increase) will give you some saving.
8. Use a Blend-and-Extend Option
Some lenders offer a blend-and-extend option, combining your current mortgage rate with a new rate over a longer term. This can reduce the penalty when you eventually sell. This strategy requires a very experienced mortgage specialist with your current lender to be successful as a lot of the policy and procedure are opaque at best.
9. Utilize Other Prepayment Privileges
Many lenders allow you to increase mortgage payment and double up on payments. This strategy takes time to implement so it is important to play well in ahead of your sale or mortgage refinance/switch.
10. Work Collaboratively with a Notary
Minimizing mortgage prepayment penalty is not an ordinary part of the conveyance or refinance process. Some lenders do not allow prepayment options to be exercised once the notary has requested a payout statement from them. While the legality of this practice is questionable, it is nonetheless helpful if you inform your notary at the onset of your engagement that you wish to take active steps in minimizing your prepayment penalty.
Final Tip: Every mortgage agreement is different, and the right strategy depends on your lender’s terms. If you are selling a property in Burnaby or anywhere in BC, our notary office can review your payout statement, explain your options, and work with you to reduce your mortgage prepayment penalty upon request.
Contact us today to discuss your real estate conveyance needs and ensure a smooth and cost-effective sale.