Example:
For the purpose of this calculation, we will consider the following data:
Mortgage amount; $ 80,000
Remaining term; 2 years
Interest rate; 7.75 %
THREE MONTHS OF INTEREST
This is the simplest method. The calculation of three months of interest on the
aforementioned loan would amount to 1 520 $.
RATE DIFFERENTIAL
Calculating the rate differential is more complex. To do so, we must compare the
market rate at the time of reimbursement for the remaining term. If the market rate
is 5.75 % for a 2-year term, the lender would suffer a 2 % loss on 80 000 $ for
2 years. Result: 3 200 $.
However, if the market rate is 8 % for a 2-year term, the lender would not suffer
any loss since the loan is being reimbursed at 7.75 %, which can be adjusted at
8 %.
In the first example, the penalty would be the rate differential and, in the second
example, three months of interest.
Naturally, there are different methods to address a penalty: transfer your mortgage
on a new purchase or have the mortgage assumed by your buyer or opt for a blended
rate.
|