Mortgage penalties are vastly misunderstood by most of the public and can lead to a lot of frustration upon determining that they could be thousands of dollars and prohibit you from completing something that you set out to accomplish.
What form do penalties take?
1) Three months interest
As you can imagine this is very straight forward and is only 3 months worth of interest only on your outstanding mortgage balance. There are no hidden calculations here and most people can determine this penalty just using the calculator on their phone. This is usually the cheaper of the two penalties.
2) Interest Rate Differential or IRD
This penalty calculation is the source of the very large mortgage penalties that you have heard about or experienced yourself and essentially the lender charging you their perceived loss of interest on your mortgage over the remainder of your term. This penalty differs in calculation from one lender to the next with the big banks being the worst of all calculations.
Each lender treats their penalty calculations differently and some have even more restrictive terms and penalties than the ones noted above depending on the product. It is important that you fully understand what penalties and restrictions you may face when deciding upon a new mortgage lender and term. You should be considering your plans for that property and your life over the duration of the term of that mortgage to ensure you will not be stuck large mortgage penalties.