Penalties are fees a lender charges when a borrower breaks the terms of their mortgage agreement, such as paying off the mortgage early, refinancing, or switching lenders before the term ends. These fees are typically higher for fixed-rate mortgages than variable-rate ones.

Key Aspects of Mortgage Penalties:

• Interest Rate Differential (IRD): For fixed-rate mortgages, penalties are often calculated using the IRD, which can lead to high fees if interest rates have dropped since the mortgage was obtained.

• Three Months' Interest: For variable-rate mortgages, penalties are generally simpler and are often calculated as three months' worth of interest payments.

• Varies by Lender and Product: Different lenders and mortgage products have varying penalty structures, so it’s crucial to review your mortgage contract carefully.

Understanding mortgage penalties is essential for borrowers considering breaking their mortgage, as these fees can impact the overall cost-effectiveness of refinancing or switching lenders.

To learn which lenders often have high penalties, read our Lender Reviews.

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