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With my new zest to pay my mortgage down faster it made sense to do a little research in regards to the maximum allowed payments I could make on my mortgage without having to pay a mortgage penalty.
First of all, if you have an open mortgage (meaning you can pay down your mortgage whenever the heck you please and no one is going to bat an eye) this post doesn't apply to you. If you have a closed mortgage (like most of us out there), you pay for a lower mortgage rate but there are more restrictions, such as not being able to pay down the mortgage whenever you please and having to pay a penalty for it. If you want to find out more information between open and closed mortgages and you're out shopping for mortgages in the Spring Real Estate Frenzy season, check out this old but good Young and Thrifty post here.
Why it is Important to Know Your Mortgage Penalty
There are multiple reasons why you might want to know your mortgage penalty.
- You're thinking of moving and you can't port your mortgage
Or perhaps you don't want to port your mortgage. As TM mentioned in that post, there are many different reasons when it makes sense to port your mortgage and many different reasons when it does not make sense to port your mortgage.
- You're thinking of paying down your mortgage
This is the situation that I'm in right now. I have a lot of money in cash that I'm not really investing with. I am pondering about the Smith Maneuvre. I don't want to pay too much of my mortgage down to trigger a penalty. I wanted to make sure that I was aware of the mortgage rules and how much I can pay down.
- You're thinking of taking advantage of the lower interest rates
With the recent decrease in interest rates announced by the Bank of Canada, many people are buying buying buying (and leveraging leveraging leveraging) and taking advantage of the low rates. Some people are even thinking about breaking their mortgages and taking advantage of the lower rates. The best way to see whether this is a good idea for your financial situation is to use a mortgage penalty calculator.
Use a Mortgage Penalty Calculator
Usually, if you break your mortgage agreement, you will have to pay three months of interest or the interest rate differential, whichever is higher. The penalty can be jaw dropping, so beware. There many online calculators that can tell you whether paying down your mortgage or switching your mortgage (e.g. taking advantage of the lower interest rates) is “worth it”. Here is one by Rate Supermarket that is pretty black-and-white and tells you straight up whether it's a good idea or not to break your mortgage to take advantage of the lower interest rates. Here is a list of penalty calculators from Canadian Mortgage Trends blog if you want to calculate it again and again just to make sure.
Is it Worth It to Pay It Down?
For me, it's definitely not worth paying down my mortgage to the point of triggering a penalty. It's not even worth switching to a lower mortgage rate because of the recent low interest rates. My rate is already pretty decent (under 3%) and I don't have (relatively speaking I suppose!) a large balance remaining on my mortgage.
I will try and pay down the mortgage to make sure I pay down the principal effectively. For me, that means paying up to 10% of my original borrowed amount and double up payments with each mortgage payment. I have an accelerated biweekly mortgage payment schedule. Instead of doubling up my payments twice a month, I am opting to pay an extra amount once a month and trying to pay the maximum allowed principle payment once a year. This allows me to save some of my money for investing or for my rainy day fund. This will bring my mortgage from 25 years to five to seven years, which is kinda nice I think. I will save over $50,000 in mortgage amortization interest costs according to a mortgage extra payment calculator I used.
Readers, are you thinking of paying the penalty and renewing your mortgages with the low interest rates recently?
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