1. What is Mortgage Prepayment Penalty?

A mortgage prepayment penalty is a fee charged by lenders when borrowers pay off their mortgage early. This compensates lenders for lost interest income. Penalties are typically the greater of 3 months' interest or the interest rate differential (IRD).

2. How Does the Calculator Work?

The calculator uses two methods to estimate your prepayment penalty:

Where:

• 3 Months Interest — Calculated as: (Mortgage Balance × Interest Rate) ÷ 12 × 3
• Interest Rate Differential (IRD) — Simplified calculation: (Mortgage Balance × Rate Difference) × Remaining Term
• Rate Difference — Your rate minus current market rate

3. Understanding Penalty Types

3 Months Interest: Common penalty for variable rate mortgages or early in fixed terms.
Interest Rate Differential: More complex calculation used for fixed-rate mortgages, compensates lender for lost interest.

4. Using the Calculator

Tips: Enter your current mortgage balance, interest rate, remaining term, and current market rate for similar mortgages. The calculator will estimate your potential prepayment penalty.

5. Frequently Asked Questions (FAQ)

Q1: When do prepayment penalties apply?
A: Typically during the first 3-5 years of a mortgage term, or when breaking a fixed-rate mortgage early.

Q2: Are all mortgages subject to prepayment penalties?
A: No, some mortgages (especially open mortgages) allow prepayment without penalty.

Q3: How accurate is this calculator?
A: This provides an estimate. Actual penalties may vary based on your specific mortgage contract.

Q4: Can I avoid prepayment penalties?
A: Some lenders allow annual prepayment privileges (usually 10-20% of principal) without penalty.

Q5: Is the penalty tax deductible?
A: In some cases, yes. Consult a tax professional for advice specific to your situation.