There are many reasons why someone may want to pay off a mortgage early, for some people the benefit lies in locking down a lower interest rate. However, early payment always comes with some form of a penalty.
Common practice is that lenders will compare your interest rate to their current interest rate for the term closest to the amount of time left on your mortgage. Since there’s no rule about which rate to use, they can use any one.
So what can you do to combat this? Well, if you know the annual prepayment amount for your mortgage (usually between 10% and 20% of mortgage), ask your lender to apply that before they calculate the IRD (Interest Rate Differential). If you’re working with a good lender, they’ll do this anyways, but unfortunately sometimes you need to ask.
You can also do your research and check out the other options out there, shopping around is recommended for renewals. You can always remind your lender that you’ll take your business elsewhere if they are making this a painful process for you.
Another thing to keep in mind, is that your home is not a retirement plan. If you’re relying on equity in your home for retirement, it means you’re dependent on what’s happening in the real estate market, and as we know in Calgary, the market is far too cyclical to rely on something like that.
It’s always important to be diligent when it comes to your money! Bottom line: always do your research and explore your options. If you have any questions about this topic, or mortgages in general, feel free to contact me or tweet me. You may also want to explore my ‘Adopt My Mortgage’ option as well.
