What is the difference between mortgage penalty fee and mortgage cancellation fee?

"What is the difference between mortgage penalty fee and mortgage cancellation fee?"

Trying to understand all of the terms and possible penalties and the basic ins and outs of mortgages is not a simple task.  Sometimes, as a home buyer, information can get to be too much and too confusing, and makes purchasing a home or a pre construction condo that much more daunting. 

I’ve always liked to explain fully to my clients the situation so that they can make an informed decision, and move forward from there.  One of the biggest mortgage aspects that get confused is the difference between a mortgage penalty fee, and a mortgage cancellation fee.  Both are very different fees that need to be understood prior to taking out a mortgage.

A Mortgage penalty fee is a fee that is applied when someone wishes to get out of their mortgage.  This could be for a number of reasons but the most common is either overpaying the lender, and refinancing or selling your home.

Depending on the terms of your mortgage, these fees could be upwards of thousands of dollars.  Generally when you sign up for a mortgage, penalties are clearly defined, and generally equal to either 3 months interest (on the mortgage) or and interest rate differential – obviously the one that is greater is the one that you will have to pay. 

Depending on the type of mortgage that you have, either fixed or variable rates, will also determine how much you pay.  Generally those in a fixed rate mortgage will have to pay a greater amount (usually the interest rate differential), where as those in a variable rate mortgage would only have to pay 3 months interest.  This is always something to consider when applying for a mortgage.

Calculating the actual fees is also somewhat of a headache – and it is not always consistent throughout the spectrum.  Generally the interest rate differential is calculated by the amount that you are already pre-paying, and the interest rate amount that the borrower could get today if they were to lend to someone else.  These fees can be astronomical, and a little concerning.  Also, it must be noted that each lender calculates the mortgage penalty fees differently.  As a client you must understand what you are getting into prior to signing up. 

A mortgage cancellation fee is somewhat similar, but is generally determined by the brokerage that is lending.  These fees could be a percentage (determined by them) of the amount lent.  Mostly cases are determined individually and depending on the circumstances, the fee would be based on the final decision.  Cancellation fees are generally imposed because the client finds a better rate somewhere else, or has a situation beyond their control to deal with.

Whatever the case, mortgage penalty fees, and mortgage cancellation fees need to be understood and factored in when taking on a mortgage.  It is important as a client to get the bigger more realistic picture, and have answers to all of the “what if’s” before signing the dotted line. 

Whether you are a first time buyer, or a seasoned buyer, I can help you understand the current market situation, and the future outlook, and what that means for you.  The condo market in Toronto is booming, and pre construction condos are always something that is worthy of an investment.  Contact me today and let’s chat!

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