When choosing a mortgage lender, the future payout penalty may have an impact on which lender you choose.
Interest Rate Differential (IRD): The IRD is essentially a penalty amount charged by lenders if you pay off your mortgage early or pay more than the prepayment privilege allows. It is based on the difference between your original interest rate and the current rate a lender can offer on new loans.
3-Month Penalty: This penalty is calculated based on the interest portion of your monthly payment. To calculate the penalty, take the interest portion of your monthly payment and multiply it by three. The 3-month penalty is often lower than the IRD, and lenders will usually charge whichever is greater between the 3-month penalty and the IRD.
Sale-Only Clause: A sale-only clause in a mortgage means that the loan can only be paid off in full if the property is sold. If you want to switch lenders during the mortgage term, you will not be allowed unless the property is sold. Mortgages with a sale-only clause should only be considered if you are sure you will not be changing lenders before the maturity date, or if you are prepared to sell the property before that time. It's also important to check if the penalty is based on a 3% of the balance, the 3-month penalty, or the IRD.
3% of Balance: The 3% penalty is calculated as 3% of the outstanding mortgage balance. For example, if your remaining balance is $400,000, the penalty would be $400,000 x 3% = $12,000.