Penalties
Prepayment Penalty
The fee charged when you pay off, refinance, or break your mortgage before the term ends.
When you break or refinance a mortgage before the term ends, the lender charges a prepayment penalty. On a fixed-rate mortgage, the penalty is the higher of three months' interest or the Interest Rate Differential (IRD). On a variable-rate mortgage, it's typically just three months' interest.
Most mortgages also include a prepayment privilege — you can pay an extra 10–20% of the original principal each year, plus increase your monthly payment by 10–20%, with no penalty. Some lenders offer larger privileges; A Lender mortgages typically have stricter privileges than monoline lender mortgages.
If you're considering breaking your mortgage to take advantage of lower rates, a mortgage agent can model whether the interest savings outweigh the penalty cost.