When choosing a bank you should consider not only mortgage rate and payment options but also different fees that the bank can take from you. So, today we will illustrate the penalty for breaking mortgage scotiabank, show you how it is calculated, and tell you other useful information.
Prepayment Penalties
Prepayment penalty is a change in the balance of your debt on a loan to the bank. It is achieved by repaying part of the loan in excess of the monthly payment. In general, it is correct to repay the loan ahead of schedule, because this reduces overpayment and helps to close the loan with minimal financial losses. But very often people make early repayment incorrectly, which leads to an increased overpayment to the bank.
Many people wait until a large enough amount has accumulated so that they can then go to the bank and repay part of the loan at once ahead of schedule. This is not correct, because the later we repay, the less the savings will be. This follows from the peculiarity of annuity payments – the most popular type of loan payment.
With an annuity, the mortgage is paid in equal installments – the amount of the installment remains unchanged throughout the entire loan period. The payment itself consists of two parts – the principal debt (or the body of the loan) and interest, which are charged by the bank. The main feature is that at the beginning, the monthly installment is almost entirely spent on paying interest, while the borrower’s principal debt does not decrease. Gradually, this ratio is leveled: if at first you pay off mainly interest, then the funds go to the debt account.
This is how the bank insures itself: it receives interest in advance and loses almost nothing, even if the mortgage is paid ahead of schedule. Under a differentiated system, at the beginning the borrower makes large monthly installments, but their size decreases every month. This is due to the fact that the body of the loan is repaid in equal parts throughout the entire loan period, and interest is charged on top of a fixed amount. With early repayment of the mortgage, the overpayment will be less: the difference is especially noticeable with large amounts and terms of lending.
It is good to repay in excess of the monthly payment, but you need to be honest with yourself. You should have financial savings of at least 3, or better 6 monthly loan payments. This is in case you or your wife/husband get fired from your job, you get sick, etc. There may be unpredictable circumstances that will not exempt you from the monthly loan payment. What’s the use if you repay the loan ahead of schedule, then you will not have the means to pay the monthly payment? If the payment is late, banks impose fines and penalties.
However, in our case, we need also to consider the penalty for breaking mortgage scotiabank. So it will be twice as hard to close a mortgage ahead of schedule. And when you will see a penalty for breaking mortgage scotiabank you will think twice before changing your lender or making prepayments.
Penalty For Breaking Mortgage Scotiabank
Before we jump to the penalty for breaking mortgage scotiabank let’s talk about other fees. They may vary from 70 to 270$ depending on the city you live and they also include:
- discharge fee (what some in our industry call the “goodbye kiss.” They’re charged whenever you “discharge” a mortgage and leave your lender)
- registration fee (a fee for registering something officially)
Examples Of Prepayment Penalties Scotiabank
The same as when you use a mortgage payment calculator you can use an online mortgage penalty calculator. Depending on whether you have a fixed or variable mortgage rate, Scotiabank will charge you one of two prepayment penalty fees:
- Interest rate differential (IRD)
- Three months’ interest
Interest rate differential (IRD) is a way that Scotiabank calculates how much money it will lose if you decide to leave it earlier than it was written in your contract. The result is that you must pay the bank a discharge fee. When calculating IRD a bank considers the time which is left for you to pay your mortgage, mortgage rate, and remaining mortgage balance.
For example, your remaining balance is 200.000$ with a 5-year fixed term. Your mortgage rate when you signed a contract was 5.49% and you have 2 years of payments left. Now the current mortgage rate is 3.14%. In this case, your IRD factor will be 0.0020 ((5.49%-3,14%)/12 monthly interest rate). After that, we need to multiply IRD to the remaining debt and remaining time of your mortgage (0.0020х200.000$х24 months) resulting in 9.400$! That is a lot!
Moreover, as it was stated above, you also need to pay an additional discharge fee of 270$ if you live in Ontario (or 200$ if you live in New Brunswick, for example). This makes it even bigger resulting in 9.670$.
The other way to calculate your penalty fee that is used by Scotiabank is three months` interest. So to say, it is the amount of interest you would have paid in a three-month period on your current mortgage. Scotiabank calculates three months’ interest by multiplying your current mortgage rate by the mortgage balance and again by 0.25 (represented as 3/12 for the three-month period out of the year).
If we take the same numbers as in the example before, but with the difference that now our mortgage has a variable mortgage rate of 2.50%, we will receive 2,50%х200.000$х3/12 = 1.520$. If you are lucky enough to live in the center, be lucky enough to pay an additional discharge fee of 270$, resulting in us 1.520$.
Penalty For Breaking Mortgage Scotiabank: Conclusion
When you check your credit score, remember that Scotiabank followed one of the lending rules in Canada. By prepaying your loan early you will get a penalty for breaking mortgage scotiabank.
You can do all calculations of penalty fees online for a mortgage. And remember that It is very important to know all your fees before you start paying on time your loan.