What is a Prepayment Penalty?

WHAT IS A PREPAYMENT PENALTY?

A prepayment penalty is a penalty that a borrower may incur if they violate the terms of their mortgage by making larger monthly payments than allowed in the loan agreement with their lender, or if the borrower tries to pay the outstanding balance on a mortgage before the expiration of the loan term. It is important that the borrower familiarizes themselves with the terms of the mortgage agreement prior to deciding to sell or refinance the property. We regularly find that our clients are surprised by the amount or existence of a prepayment penalty on a payout statement received from the lender in a sale or refinance transaction. This is especially true for clients with fixed-rate mortgages, as they typically have higher prepayment penalties when compared to variable-rate mortgages. An experienced mortgage broker will always check the terms of your previous mortgage to warn you of any potential prepayment penalties. In certain circumstances, the lender may include special annual prepayment privileges. An example of a prepayment privilege may allow the borrower to make one extra annual payment on the principal amount of the mortgage.

If you are involved in a real estate transaction, contact us today to set up a consultation. Our real estate law team has the experience and knowledge to assist you throughout every step of the transaction.

Disclaimer: The information contained in this article is not to be construed as legal advice. The content is drafted and published only for the purpose of providing the public with general information regarding various real estate and business law topics. For legal advice, please contact us.

About the Author:

Shahriar Jahanshahi is the founder and principal lawyer at Jahanshahi Law Firm with a practice focus on representing business star-ups and investors in the province of Ontario. For further information about Shahriar Jahanshahi, click here.