How to avoid or minimize penalty when breaking a mortgage

If you’re getting a new long-term mortgage,  odds are you will consider making changes before maturity. The majority of people will either:
•    Add money to their mortgage
•    Add a secured  line of credit
•    Refinance to get a better rate (which happens less frequently nowadays)
•    Increase the amortization
•    Port their mortgage to a new home, or
•    Discharge it outright.

Some of the above will require an early pre-payment charge (penalty). Even though  major banks have lower funding costs sometimes they charge more than twice of what a smaller lender would charge for the same term mortgage. Some times penalties could be tens of thousands of dollars and it's important to know about them regardless if property is your home or an investment.

Here are some questions to ask a lender about its penalty:

If I break the mortgage and stay with you, will you forgive a percentage of my penalty or apply unused prepayment privileges, to reduce my penalty? 
More lenders are doing this as competition grows.


If not, can I make a prepayment a few weeks before breaking my mortgage to lower the balance used to calculate my penalty? 
When determining a penalty, some lenders refuse to consider prepayments 30-90 days before you request to discharge.

Can I increase my mortgage without a penalty? 
This is important if you ever upgrade your property or need additional funds.


If I sell my property and port my mortgage to a new one, how long can I take to close on that new property and still avoid a penalty? 
Some lenders unreasonably require you to close your old and new home on the same day, others are willing to wait for up to a month.


Can I get out of my fixed mortgage early if I pay a penalty? 
Some “low frills” closed mortgages don’t let you out before maturity – no matter what – unless you sell your home. On a flexible mortgage on another hand, most of the times you only need to pay 3 months interest to break a mortgage.

Do you charge IRD (The IRD is a compensation charge that may apply if you pay off your mortgage prior to the maturity date, or pay the mortgage principal down beyond the amount of your prepayment privileges) penalties on your variable-rate mortgage, as opposed to the standard three-month interest? 
Despite being highly unorthodox, a few lenders actually do this and it can cost you.

How long will you honor your IRD penalty quote? 
This is relevant if you’re trying to discharge a fixed-rate mortgage while rates are dropping. Falling rates can increase your IRD penalty.

By March 5th, 2013 industry will go a step further by requiring banks to provide annual information that will help consumers calculate their penalty, written penalty statements upon request with clear calculation explanations, and access to exact prepayment penalty quotes by phone.