Is the following Mortgage Prepayment Penalty Calculation Correct?

[Nir]

Hi,

I know a seller who unfortunately took the worse mortgage possible in 2007:
a 10 yrs term 6% fixed interest mortgage! current principal is around 300k.

Is the following calculation correct:

Penalty to "open" mortgage today (I think it is called mortgage prepayment penalty?) =
Number of years till renewal date x mortgage interest rate minus current prime x mortgage principal =
8 yrs x (6%-2.25%) x $300,000 = $90,000.00!?

I hope, for the owner, that I`m wrong but I`m afraid I`m right.

THANKS.

ps. I understand there might be different mortgage contracts. I`m referring to a standard mortgage meaning the most common way the above penalty is calculated by most banks.

 

[Thomas Beyer]

QUOTE (investmart @ Dec 25 2009, 04:45 PM) ....
8 yrs x (6%-2.25%) x $300,000 = $90,000.00!?

..
right formula .. 2.25% might be the wrong rate though .. bank might use a higher rate for a 5 or 8 year fixed (say 4.25% or even 5%+) and as such, penalty might be A LOT lower.

Write to bank AND ASK !!

 

[Nir]

QUOTE (ThomasBeyer @ Dec 25 2009, 05:50 PM) right formula .. 2.25% might be the wrong rate though .. bank might use a higher rate for a 5 or 8 year fixed (say 4.25% or even 5%+) and as such, penalty might be A LOT lower.

Write to bank AND ASK !!

I thought they use prime. prime=2.25. why do you think bank might use higher rate? what`s the logic behind using (current 5 or 8 yr fixed) 4.25% or more? well, I guess they can do what they want if they put it in the contract. I think we need a mortgage broker to confirm the right formula: `current mortgage fixed interest minus prime` OR minus something else?

THANKS.

ps. re "Write to bank AND ASK !!" - not my mortgage as mentinoed but thanks.

 

[BDFI]

[quote name=`investmart` date=`Dec 25 2009, 06:41 PM` post=`74678`]
I thought they use prime. prime=2.25. why do you think bank might use higher rate? what`s the logic behind using (current 5 or 8 yr fixed) 4.25% or more? well, I guess they can do what they want if they put it in the contract. I think we need a mortgage broker to confirm the right formula: `current mortgage fixed interest minus prime` OR minus something else?

THANKS.

ps. re "Write to bank AND ASK !!" - not my mortgage as mentinoed but thanks.



The bank will use their current rate for the length of time remaining in the term (in this case ~7 years). So that is why Thomas suggested the banks 5 or 8 year fixed (since the bank probably does not have a 7 year term rate). You can search Canadian IRD calculator on the internet. Not all banks use the exact calculations but it should get you close.

 

[Nir]

BDFI, Thomas, so what is the formula? not sure I understand.
is it (6%-4.25%)? why would they want the difference between their current suggested rate and your mortgqage rate, and not just the entire interest they would get til end of term? Thanks.
so if my current mortgage rate is 4.25% - no penalty in the example (as 4.25%-4.25% = 0)?? something in your suggested formula does not make sense. tx.

 

[Thomas Beyer]

QUOTE (investmart @ Dec 25 2009, 06:41 PM) I thought they use prime. prime=2.25. why do you think bank might use higher rate? what`s the logic behind using (current 5 or 8 yr fixed) 4.25% or more? ..
this is the loss to the bank if prepaid early .. i..e cost / loss to re-lend that money !

 

[Nir]

OK THANKS Thomas. got it! - so because they can relend and get the 4.25% fixed (in the example), they only penalize for the difference.

 

[Thomas Beyer]

QUOTE (investmart @ Dec 26 2009, 05:06 PM) .. they only penalize for the difference.
right ..

 

[mortgageman]

It will depend on whatever interest rate the bank decides to base the penalty off of. That`s why you need to contact the bank and ask for the pre-payment penalty amount.
Generally it`s the best rate at the closest term available to the remaining time left on the original mortgage.

 

[Nir]

QUOTE (mortgageman @ Dec 29 2009, 03:00 PM) Generally it`s the best rate at the closest term available to the remaining time left on the original mortgage.
Thanks Jason, I`m assuming you mean the best fixed rate at the closest term available to the remaining time left on the original mortgage.
Also, do they generally use their posted rate or their "special offer" rate to calculate the penalty? (posted rate would mean lower penalty of course)

 

[medilati]

H i Investmart.
I think there are a couple of bridges to go accross the prepayment penalties legally and morally. It has to do with some banker`s tricks on how they do their investments. When you connect an open-end loan to the close-end loan called mortgage there is interest elimination; thus prepayments on loans that are really a bad business for the lendee are something very interesting to know. I found reciently a video that was on the news some time ago. Of course things are moving a lot. I posted that video on my blog if you want to take a look... http://mortgageprepaymentandcreditboost.com

Good Luck