Mortgage penalties, what is it? For various reasons, some borrowers repay their contracts before the end of the term originally planned. This solution may be advantageous on some levels, but it also generates mortgage penalties.
Recover the costs of contract changes
In order to support the revival of the real estate sector, funding agencies present very attractive conditions to potential subscribers. The context is tempting for homeowners who have taken out a mortgage at a fairly high interest rate. Many people want to take advantage of lower interest rates to break their mortgage before the deadline or renegotiate the terms of the contract. They can thus save on their monthly payments or pay more quickly their property.
However, it is important to be cautious and take a decision only after careful consideration and a calculation of the mortgage penalties that the institution could claim as a result of the early termination of the agreement. The banks justify these penalties by the administrative costs occasioned by the changes of the contract. This is a perfectly legitimate act in that the lender must seek to recover the lost interests due to the premature end of the accommodation. The penalty system may also be a backdoor way to retain the client.
The method of calculating mortgage penalties
The calculation of mortgage penalties is in principle based on the outstanding balance on the mortgage. A subscriber who terminates his or her contract at a time well in advance of the original term will have to pay higher penalties. Clearly, if he makes an early payment at 4 years before maturity, the penalty will be greater compared to that of another client who anticipates a year before its settlement before claiming a possible refinancing.
The penalties will also be quite expensive if there is a significant difference between the current interest rate and the one applied to the signing of the agreement. In general, for a fixed loan, these financial constraints are limited to the largest sum between three months of interest and the spread on rates for the remainder of the term. All this seems complex. Also, before terminating a contract, it is necessary to learn about mortgage penalties, as here and simulate a calculation beforehand to assess whether the advance payment of the mortgage could be advantageous or not.