While you may be happy with the level of customer service you are receiving at your current financial institution for your mortgage and also enjoying a sufficiently low-interest rate, at some point, you may decide to change lenders to refinance and get a better rate. Selling your home before the mortgage term is up is another reason you may wish to break your mortgage and switch providers.
As your mortgage agreement with your bank is a contract, you may incur a fee or penalty known as a “prepayment” charge if you break your mortgage before the term ends. This is your lender’s way of gathering compensation for the money they could have earned from your mortgage, but didn’t, because you left the agreement earlier than agreed. Multiple factors go into the equation for calculating prepayment penalties, and they vary considerably between banks, as well as between mortgage contracts.
All financial institutions have their own prepayment penalty calculator, and some factors that are considered when determining these charges include how long your term is, how early you plan on breaking your mortgage, your current interest rate, the balance on your mortgage, whether a fixed or variable interest rate, as well as others.
Scotiabank will charge you one of two penalty fees, and this depends on whether you have a variable mortgage rate or a fixed one. If you have a variable mortgage rate, prepayment charges equal three months’ worth of interest; however, if you have a fixed mortgage rate you will either have to pay three months of interest or the interest rate differential, whichever amount ends up being higher.
Three months’ worth of interest is pretty self-explanatory. This is the interest you would have paid Scotiabank in three months under your current mortgage with them. This is calculated by multiplying the amount owed times the rate of the current mortgage balance, and then multiplying by 0.25 (which represents “3/12” of the payment for the three months out of a 12-month annual cycle).
Meanwhile, the interest rate differential (IRD) is the time left on your mortgage term and the rate you have and then how much they could charge another client now for a new term that equals out to the remainder of your mortgage term. Scotiabank finds the posted interest rate from the day your mortgage term was signed and then subtracts that from the interest rate posted the day you break your mortgage. The fees are calculated based on both rates, and the figure is the difference between these two amounts as it relates to the length you have left on your mortgage term.
The good news is that you can also refer to Scotiabank’s Mortgage Prepayment Charges Calculator to find an approximate penalty fee for breaking your mortgage with them. If you are serious about breaking your mortgage with them, then go to their website after gathering some important documents including your mortgage contract, the cost of borrowing disclosure statement, the repayment of terms confirmation letter (this would have been mailed to you after your mortgage closed), your most recent renewal agreement with them, and your mortgage statement.
The Scotiabank’s Mortgage Prepayment Charges Calculator asks how many months remain on your mortgage term; whether you have a variable or fixed-rate mortgage; your current rate, and whether you were given a discount on this at the start of your term; whether you got cash back at the start of your term; the original date you first took your mortgage out; as well as the original amount of your mortgage, and your mortgage’s current balance.
While the calculator can’t give the exact amount of penalties, as this is calculated right down to the very day you officially break your Scotiabank mortgage, it can give a pretty accurate estimate of what you will have to pay, should you decide to take your mortgage somewhere else.
Scotiabank has also created an online document to help their clients understand prepayment fees to make informed decisions via their guideline titled What You Need To Know About Mortgages and Mortgage Prepayment Charges.
For more information on Scotiabank mortgages and prepayment fees, visit Scotiabank.