We have a mortgage for a five year term that is almost up (it is a 25 year amortization). My husband and I disagree on what will happen when the five year term is up - I think if we pay off the mortgage on the day the term is up, we won’t be charged any early-payout penalty (the penalty is three months interest). My husband thinks that if we pay out the mortgage at any time before the 25 year amortization is up, we’ll be penalized the three month interest penalty.
We’re thinking about selling our house here and moving to a much cheaper house, so we’re in a position where we might actually be able to pay off the mortgage and have no mortgage in the new house (or a very small mortgage). If we can pay off the mortgage in six months with no penalty, that would (of course) be our preference.
Agree. A mortgage can be written with any number of constraints. Usually, nowadays, there is no prepayment penalty. They are happy to get their money back so they can loan it to some new schlub and start making money again.
The “amortization” of 25 years just means that is the term they use to calculate their payments. But I’m guessing the “five year term” meant that they expect to get all their money back within five years. What most people would call a “five year balloon.”
But as mentioned, you won’t know for sure until you contact your lender.
I would think the “five year term” refers to your interest rate. At the end of this term, you would have an option of either paying off whatever you want or negotiate a new interest rate term. If could be open or closed, fixed or variable.
If the term of your current deal is almost up, I am surprised that you have not received a letter telling you exactly what you can do and trying to persuade you to sign up for more.
In the UK, you are free to pretty much do as you like when a deal ends. Of course you still owe the debt, so you have to put something in place to repay it, but paying it off is one option.
Contrary to what Tim says above (#3) they are not happy that you want to pay it off. You are a good customer, and as long as you keep paying the interest, they are making money. The new “schlub” may not be so reliable.
I took an interest in this thread because I have just paid mine off and the deeds arrived in the post last week. Now I have to invest in a fireproof safe.
Worse than that, banks (or holders of mortgage-backed securities in general) do not like prepayment, even if they know they deal only with AAA+ totally reliable mortgage-payers. The main reason people pay off their mortgages early is because they are refinancing, and the main reason people refinance is because prevailing interest rates are lower than they were when the debt was taken on/last refinanced.
That means when you refinance, the bank gets a big wad of cash that was earning, say, 7%, and now has to reinvest it in a market where prevailing rates are, say, 5.5%. That reduces their revenue even if the new guy who takes out the 5.5% mortgage is perfectly reliable.
If, on the other hand, prevailing rates have gone up (say 10%), the bank is holding onto this 7%-earning debt when it would love to have that money back to reinvest at 10%. Unfortunately for them, no sane mortgage payer would ever refinance under those conditions.
This anti-correlation between prevailing rates and probability of payback is the main reason why there are sometimes early prepayment fees.
I was talking to a mortgage broker and this is absolutely true but not for the reason most people think. Despite the housing mortgage collapse, banks are still securitizing and selling mortgages. They do not intend to make any money on interest. Instead, they make money on servicing the loans for the mortgage-security buyers.
Nowadays, mortgages are broken into components. While there may be some entities who are only making their money from servicing, there are other entities who are only making their money from interest. (More than that, the payments themselves are sometimes split into components, known as “tranches”, which may be owned by different entities.)
That’s true in the US, but may not be elsewhere. OP is in Canada, and I do believe they generally do have prepayment penalties (and one is explicitly mentioned in the OP). I’d concur with the “call your lender” advice. This varies so much country to country.
In Canada the amortization period is only used to calculate your payments. At the end of your 5 year term you can refinance with your current bank, get a mortgage with another bank (in which case they would pay off your existing balance) or pay off the balance in full yourself.
It is actually a balloon loan but it’s standard here to refinance at the point where the outstanding balance is owed.
Last year we sold our house to a developer and have been renting it back from them til our new house is complete (and until they have all the approvals they need to tear the block down) and thanks to some very good timing we were able to complete the deal at the end of our mortgage term thus saving ourselves any prepayment penalty.
Oh, absolutely, the mortgage-backed securities market still exists (and abuses not-withstanding, that kind of market existing is actually quite a good idea) and almost certainly the (commercial) bank with the offices that you go into to sign mortgage paperwork is not the same (investment) bank that actually has rights to the income from your payments and is exposed to the loss should you default. My comments were from the perspective of the latter bank.
Just to follow up: my recollection from a long-ago Land Transactions class in law school is that in Canada, federal law prohibits a mortgage for residential property with a longer term than five years. Amortisation period is subject to negotiation, but the term of the mortgage agreement cannot exceed five years. This is a consumer protection measure, to prevent a borrower from being locked in for an unduly long period and being unable to take advantage of changes in the interest rates, or more favourable policies with a different lender.
Not meant as legal advice, of course: as others have stated, first thing is to read your mortgage agreement carefully, then talk to your bank.
Well, I’m assuming that if multiple banks are openly advertising a product it’s probably legal:).
It just seems a strange sort of consumer protection law to have in the first place. It seems like it’d be easier to forbid/limit the amount of pre-payment penalties. That way everyone isn’t forced into the can-I-qualify-for-a-mortgage-I-can-afford roulette of balloon payments.
Funny – that doesn’t seem to be a problem in the States. No one is locked into anything without being able to renegotiate. I can’t even imagine how that would work – you are prohibited from paying off the loan for 30 years no matter what?
