Thornhill Wealth Forum
Penalised For Paying Down Debt
I went in for my annual financial check up to my bank this week. Unlike, my physical checkup, I do not mind going into my bank. Perhaps it is because my advisor does not poke and probe various parts of my anatomy! As much as I dislike debt, I could only achieve home ownership with the help of a mortgage. While this was necessary, paying off my mortgage as soon as possible is my goal; not to mention the financial benefits, including saving thousands of dollars in interest payments. This is what I learned from my financial checkup.
Some mortgage contracts include a prepayment penalty. This means that the bank will penalize you if you decide to pay off your mortgage sooner than the amortization period. So, banks do not really want you to save money on your largest debt! Hmmm….go figure! Perhaps this is one of the reasons that banks make so much profit each year! Fortunately, my mortgage contract does not include a prepayment penalty. Phew! This means I can make extra payments and pay off my mortgage sooner.
If you do have a mortgage that has prepayment penalty, you face some restrictions. Search your mortgage documents for the phrases “prepayment disclosure,” “prepayment penalty disclosure,” or “prepayment penalty.” Review the terms carefully before making any extra payments to ensure that you are not charged extra for doing so.
Prepayment penalty mortgages may allow borrowers to pay anywhere from 10% to 20% off the mortgage principal annually without penalty by using a principal pay-off allowance. However, a penalty is charged for payments exceeding this limit.
The actual penalty is calculated in a variety of ways depending on the lender and the terms of your particular mortgage. One mortgage may charge 2% of the outstanding mortgage amount, while another charges six months interest. When you make extra payments on your mortgage, the mortgage company is not going to earn as much interest as expected so they charge the penalty to try to recoup some of the loss.
The best time to go through the mortgage documents is before you sign them. It is definitely not exciting stuff, but hidden in that tiny print are the keys to understanding when and how much you can pay down your mortgage. The opportunity to save thousands of dollars in interest should provide you plenty of excitement.
Some mortgage contracts include a prepayment penalty. This means that the bank will penalize you if you decide to pay off your mortgage sooner than the amortization period. So, banks do not really want you to save money on your largest debt! Hmmm….go figure! Perhaps this is one of the reasons that banks make so much profit each year! Fortunately, my mortgage contract does not include a prepayment penalty. Phew! This means I can make extra payments and pay off my mortgage sooner.
If you do have a mortgage that has prepayment penalty, you face some restrictions. Search your mortgage documents for the phrases “prepayment disclosure,” “prepayment penalty disclosure,” or “prepayment penalty.” Review the terms carefully before making any extra payments to ensure that you are not charged extra for doing so.
Prepayment penalty mortgages may allow borrowers to pay anywhere from 10% to 20% off the mortgage principal annually without penalty by using a principal pay-off allowance. However, a penalty is charged for payments exceeding this limit.
The actual penalty is calculated in a variety of ways depending on the lender and the terms of your particular mortgage. One mortgage may charge 2% of the outstanding mortgage amount, while another charges six months interest. When you make extra payments on your mortgage, the mortgage company is not going to earn as much interest as expected so they charge the penalty to try to recoup some of the loss.
The best time to go through the mortgage documents is before you sign them. It is definitely not exciting stuff, but hidden in that tiny print are the keys to understanding when and how much you can pay down your mortgage. The opportunity to save thousands of dollars in interest should provide you plenty of excitement.
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