Prepayment Penalty

It may sound strange, but lenders are actually charging you with penalties if you pay off your mortgage before the end of designated mortgage term. When seen from the lenders’ side, prepayments actually cost them money in the form of reduced interest income on the mortgage deal; that is exactly why they charge prepayment penalty. The penalty itself is usually equal to 6 months of interests and other charges.

There are strong reasons why you shouldn’t use mortgage plans with prepayment penalty as part of the terms. First of all, there are regulations clearly banning the use of prepayment penalty in a mortgage scheme. Yes, lenders are actually regulated by law to charge no penalty whenever their customers pay off the loan early.

The second reason is flexibility; you may want to alter or renegotiate your mortgage when needed, and prepayment penalty will make it costly to do so. You can actually enjoy benefits from transferring to mortgage deals with lower interest rate and better profitability, but the prepayment penalty will make the transfer far less profitable in the end.

The best way to go is to insist on zero prepayment penalties no matter what. You know for sure that it is banned by law, and you have stronger bargaining power to ask for the mortgage term.