Date Posted: February 23, 2012
Seeing a light at the end of the tunnel when it comes to your mortgage payments is a terrific feeling. However, discharging early, though satisfying, isn’t without penalties.
This article from the Toronto Star illustrates various situations in which a prepayment penalty can occur, and how to avoid paying more than necessary. This is of particular importance to those with a variable rate mortgage, which has a fluctuating rate based on prime. In this case, when the prime rate is lower, more of the payment will go towards the principal than the interest. If you choose to pay off this mortgage early, the bank will lose out on interest payments and you can incur a penalty.
There are also options to avoid penalties when renewing for only a short term.
– Renewing for a short term at a variable rate but keeping payments the same and paying what is left over at the end
– Taking out a short term fixed rate mortgage and increasing monthly payments
-Increasing only your mortgage term and decreasing your payments. This is a good option for those who don’t have as much financial freedom.