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February 2012 - Know your mortgage interest penalty before selling your house to avoid surprises

Know your mortgage interest penalty before selling your house to avoid surprises

☳ by Adam Aspilla

Selling a house cost much money. Some of the common cost are: agent’s commission up to 6% of the selling price; legal fees and disbursements up to a thousand dollars or more; and a mortgage interest penalty when a house is sold before the maturity of a fixed-term mortgage. 

Mortgage interest penalty would depend on the remaining years and months the mortgage matures from the time the house is sold. The longer its maturity from the time the property was sold the bigger the penalty.

The usual penalty is interest to maturity. For example, if there were 14 more months to go from the house was sold before the mortgage matures, and your mortgage monthly payment is $1,300.00 and with a 30 years amortization period, the penalty might be $1,000.00 a month or $14,000.00 (14 months x $1,000.00) more or less, if the bank would charge interest up to maturity.

Why is it too big? Because of the monthly payment of $1.300.00 only a small portion of it goes to the principal for it has a long amortization period of 30 years. For the exact penalty you have to look at the amortization schedule that is usually provided by your lender, where the amortization period and interest are factored in the calculation. Better still you have to ask your lender to calculate the penalty should you plan to sell your house.

If you negotiate with the bank there are instances where it will agree to reduce the interest penalty.

However, you can avoid paying the interest penalty even if you are selling your house before the maturity of its mortgage, if you are buying a new house by just transferring your existing mortgage to the property you are buying. You need to arrange this with your bank.

Another instance where you are not going to pay a mortgage interest penalty is if your mortgage is an open mortgage (not fixed) where you are allowed to pay it off anytime without penalty.

If your mortgage is fixed, not yet mature and you are not buying a new house, to avoid surprises (of paying thousands of dollars in interest penalty) on the closing date, you need to know how much would be the interest penalty before deciding to sell your house.

After knowing the amount of the interest penalty you have to make a decision to sell your house now or to delay selling it to avoid paying the interest penalty or to at least reduce it..

 

 

Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.