Negotiate with your lender
Some lenders may be willing to negotiate with you to reduce or even remove the prepayment penalty, but you'll need to call and ask. They may be more likely to negotiate if you've made your payments on-time every time.
Keep in mind that borrowers can try to negotiate with their lender to remove a prepayment penalty clause – or search for a lender that doesn't charge this fee. You also can ask your lender to quote you a comparable loan without a prepayment penalty so you can compare your options.
It's very common for borrowers to make prepayments and close the home loan account early. Therefore, to avoid an early payment penalty, you should keep room for prepayments when you are planning to take a home loan and calculate the EMI. It will help you to choose the loan type accordingly.
Typically, a prepayment penalty only applies if you pay off the entire mortgage balance – for example, because you sold your home or are refinancing your mortgage – within a specific number of years (usually three or five years).
Switch to an offset mortgage
This links a savings account to your mortgage. Money in your savings account is used to offset your mortgage cost, saving you interest and helping to pay it off earlier. Doing this can also help you to avoid early repayment charges.
Most states allow lenders to impose a fee if borrowers pay off mortgages before a specific date – typically in the first three years after taking out a mortgage. While Alaska, Virginia, Iowa, Maryland, New Mexico, and Vermont have banned prepayment penalties, other states allow them with certain conditions.
A prepayment penalty is only allowed during the first three years after the loan is consummated. After three years, a prepayment penalty isn't allowed. (12 C.F.R. § 1026.43(g) (2024).)
Mortgages with flexible features (such as offset mortgages or those with a 'borrow-back' facility) allow you to overpay and borrow the money back. So you can overpay the mortgage, then withdraw cash without penalty if you need it again.
You can't prepay, renegotiate or refinance a closed mortgage before the end of the term without a prepayment charge. But, most closed mortgages have certain prepayment privileges, such as the right to prepay 10% to 20% of the original principal amount each year, without a prepayment charge.
It generally reflects a percentage of the loan principal. The good news is that most borrowers aren't subject to a prepayment penalty nowadays, but it's important to confirm before you get or refinance a mortgage, list your home for sale or attempt to pay off your mortgage early.
If you're remortgaging, and nearing the end of your current deal, some lenders may be willing to waive the early repayment charges it would normally charge if you take out a new deal with them. However, any new deal must be right for you.
Lenders expect to receive interest income from the monthly payments on any given loan, and when the loan is paid off early, the income is less than expected. To make up for this loss, lenders often require the borrower to pay a fee, a premium, or more colloquially referred to as a “penalty”.
You can try to negotiate to remove it from the contract. Ask your lender if they'll waive the prepayment penalty fee. If they agree, get it in writing. You can also ask your lender for a mortgage quote without a penalty, but a mortgage quote without a penalty fee may have a higher interest rate.
Borrowers may be allowed to foreclose or prepay their loan 6 months after the date it has been disbursed, without any prepayment penalty. A charge of 2.5% + GST will be levied on any prepayment amount that is over 25% of the principal due. Part prepayment can only be done once in a year.
In each case, the penalty is directly related to the amount borrowed under the financing agreement. The payment is not for any specific services, other than for the loan. For this reason, the prepayment penalties are deductible as interest to Taxpayer.
Paying a little extra towards your mortgage can go a long way. Making your normal monthly payments will pay down, or amortize, your loan. However, if it fits within your budget, paying extra toward your principal can be a great way to lessen the time it takes to repay your loans and the amount of interest you'll pay.
A 5-4-3-2-1 prepayment penalty, otherwise known as a 5 year stepdown prepayment penalty, charges a 5% fee on the outstanding principal loan balance if the loan is paid off in year 1, a 4% fee in year 2, a 3% fee in year 3, a 2% fee in year 4, and a 1% fee in year 5.
The early payoff may disturb their cash flows and reduce overall interest receipts. Additionally, these fines make borrowers stay with the same lending terms, discouraging refinancing or switching lenders too often.
The statute prohibits prepayment penalties or other charges for prepayment on any written mortgage contracts where the interest rate exceeds 8%. The prohibition does not apply to loans insured by federal agencies.
Unlike mortgages issued by some traditional lenders, Federal Housing Administration (FHA) loans do not have prepayment penalties.
A prepayment penalty clause is common in mortgage contracts , and it specifies that if the borrower pays down or pays off the mortgage early, usually within the first five years of the loan , a penalty will be levied.
Prepayment privileges are the opposite of prepayment penalties. Prepayment penalties are fees or charges imposed on borrowers by lenders for paying off an account prior to its maturity. They may be a set dollar amount or a certain percentage of the principal balance.