A payout penalty is charged when you pay off the mortgage principle prior to the renewal date or pay the mortgage principal down beyond the allowable prepayment privilege amount. The most common payout penalty calculations are the GREATER of 3 months interest or interest rate differential (IRD)
3 months interest– Amount currently owing on your mortgage x current interest rate charged divided by 365 x 90 days
Example – $300,000 x 5% divided by 365 x 90 days = $3,698.63
Interest rate differential– The IRD amount is calculated on the amount being repaid using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate the lender can now charge when re-lending the funds for the remaining term of the mortgage.
|Step 1: ________ (A)||the current interest rate under your Mortgage expressed as a decimal (for example, 6.75% = .0675)|
|Step 2: ________ (B)||the current interest rate that your existing lender can now charge for a mortgage term offered with the term closest to your remaining term. Make sure it is expressed as a decimal.|
|Step 3: ________ (C)||A – B = C, which is the difference between your current interest rate and the interest rate in B above (write C as a decimal)|
|Step 4: ________ (D)||amount you want to prepay|
|Step 5: ________ (E)||number of months for the remaining term of your Mortgage|
|Step 6: ________ (F)||(C x D x E) ÷ 12 = F, F is your estimated Interest Rate Differential Amount|
A= 5% or 0.05 B= 3% or 0.03 for a 3-year term as that is what is left on your existing term C= A- B= 0.02 D= $300,000 E = 3 yrs X 12 = 36 months
F = 0.02 X $300,000 X 36 months = $216,000 divided by 12 = $18,000 interest rate differential payout penalty
In this case, you would be charged the Interest Rate Differential as it is the GREATER of the two.
**These calculations are very basic as some lenders use different calculations for payout penalties. Your lender is the only one who can give you an exact figure.
**NOTE** Some of the non-bank lenders have different pay out penalties and it is up to you as the borrower to be aware of exactly what they are prior to committing to the mortgage terms.