Understanding Pre-Payment Penalties: Why Lenders Charge Them and What You Need to Know.

​A pre-payment penalty is a fee charged by lenders when borrowers exit their mortgage contract and term early, such as refinancing, selling the property, or paying down the mortgage beyond the allotted pre-payment privilege. The penalty is calculated based on the remaining mortgage balance and a few months' worth of interest or the interest rate differential. Lenders charge this penalty to protect themselves against potential financial loss. Borrowers should understand how their prepayment penalty would be calculated before agreeing to borrow money.

Annual Percentage Rate (also known as an APR) 

The APR indicates the total cost of borrowing.  The APR is expressed as a percentage and it incorporates all fees associated with a mortgage that are not compounded. For example, an administration fee to pay your property taxes with the mortgage would be reflected in the APR. There are different fees associated with each lender. A lender may or may not charge administration fees; but if they do, it would be reflected in the APR. 

The APR is usually reflected in an interest rate (%). A Mortgage Broker or Bank Specialist can break this down for you by showing you total fees associated with your mortgage noted in the Mortgage Commitment. 

Land Transfer Tax

Land Transfer Tax is a charge paid to the provincial government when purchasing real estate in Canada. It is calculated based on the value of the property and is payable in addition to the mortgage amount owing on a property or the debt assumed on a transfer conveyance. There are two types of land transfer taxes in Toronto: Provincial Tax, which is the nationwide standard tax, and Municipal Tax to the City of Toronto. The tax rates vary depending on the value of the consideration, with amounts up to $55,000 charged at 0.5% and amounts exceeding $2,000,000 charged at 2.5%.

Maturity Date

The Maturity Date means the end date of a mortgage contract. It's the date of mortgage expiry and when the mortgage must be repaid out in full or has come due. The mortgage balance must be repaid on this date. 

Interest Adjustment Date

The Interest Adjustment Date is the date that a lender starts collecting interest on the loan. Interest adjustment dates usually fall on the first of the month. If a mortgage is registered on another day, there will usually be an interest adjustment payment taken before the first official payment.

Pre-Payment Privilege

A mortgage pre-payment privilege is a clause in a mortgage contract that allows borrowers to make additional payments on their mortgage beyond their regular payment schedule, without incurring a pre-payment penalty. This privilege can help borrowers pay off their mortgage faster, reduce the amount of interest paid over the life of the mortgage, and potentially save thousands of dollars. The pre-payment privilege can vary depending on the lender and the mortgage product, so it's important for borrowers to review their mortgage contract to understand the terms and conditions of their pre-payment privilege.

Understanding Collateral Mortgages

​A collateral mortgage is not a conventional mortgage, as it is based on the assumption that the borrower may take out additional credit products with the same lender in the future. It is a promissory note with terms that can differ from those of a conventional mortgage. A collateral mortgage can be registered for up to 125% of the property's value at an interest rate of around Prime, plus 10%, to take into account any possible credit taken out in the future by the borrower. The purpose of a collateral mortgage is to avoid renegotiating the mortgage if the borrower requires additional credit in the future. However, a downside is that it restricts the borrower from obtaining future secured credit products with a different financial institution.

Understanding Conventional Mortgages

A conventional mortgage is a type of mortgage where all of the terms, such as the interest rate, term, mortgage amount, and amortization, are agreed upon beforehand.