How to reduce mortgage penalties
Backing out of a mortgage early? You probably won’t be able to avoid fees entirely, but you can limit them.
Regardless of the reason you're breaking your mortgage early, be prepared that penalties will follow. The standard practice used to be 3 months interest across the board. However, in 1999 when the Canada Mortgage and Housing Corporation (CMHC) removed it from their written policies, some lenders adopted what is now known as the Interest Rate Differential (IRD).
The IRD is meant to compensate the lender for their losses when a client breaks the mortgage early. As there is no regulated way to calculate the fee, it can tend to vary from lender to lender, making it difficult to know what your penalty will be if you do choose to break your mortgage early.
So what actions can be taken to ensure you're charged the lowest penalty possible? First, ensure your lender applies the annual prepayment before the IRD is calculated. In addition, make it clear that you are prepared to shop your mortgage to other lenders if you aren't pleased with the terms offered upon renewal. Your Mortgage Broker can assist you in finding a mortgage that will better suit your needs.