In the otherwise mystifying realm of home mortgages, it's a fact that very few banks hold onto the loans they make.

These banks, like most of the banks in the city of Montreal, continue to administer the loan; however they sell these loans in the secondary mortgage market to investors, who buy these mortgages in lots of around $100 to $500 million. The investors who buy these mortgages plan on earning an interest on the loan for the remainder of the term.

If a mortgage is paid up before the term is over, irrespective of whether little time is left on the loan, the lending bank will have to take care of the contract changes, and pay off as well the lenders for the amount of future revenues they are not going to earn because that loan has already been paid off. These additional charges are not absorbed by the bank, but are tossed on to home borrowers in Montreal for instance, either in the form of charges and penalties.

How The Montreal Housing Market Is Faring Now

According to figures collected from the Canadian Real Estate Association, in spite of the dip in home sales in the third quarter of last year, the country is heading towards its best year ever. And even if it falls short, the market hasn't hit a serious slump in any manner.

The continuing growth of the Canadian economy is associated with an even larger influx of foreigners who plan to migrate or conduct business in the country. The continuing high demand for various commercial and housing properties in the country has resulted in an increase in the value of commercial properties for the country as a whole.

The high value of real estate property in cities like Montreal further increases the attractiveness of commercial real estate in the country. There currently is a surplus of homes available on the housing market, and many observers see this as a fairly negative sign of the overall housing condition. Pending home sales however, were surprisingly high in the month of December, but this is hardly an indicator of the current state of the real estate market.

How Lenders Calculate Mortgage Penalties (Hypotheque)

A major reason why mortgage lenders stretch payments for home loans and penalties, is that these lenders want to induce their clients to stay with them, and this serves as a method for them not to lose clients. Home loan lenders use two methods to calculate the penalty and, since there is more than one way, you can be sure they will use the method that yields a higher amount for them

- Number of months interest penalty (2, 3 or 6 months)

In computing this, you will need to separate the interest piece of your mortgage payment from the principal, and then multiply it by the number of months elected for the penalty.

A good example would be this: When a 25 year, $200,000 mortgage is pegged at 5.4%, if it is paid off after 30 months, the monthly payments are $1,209.17 and the interest portion on the 30th month is $846.18. In using a 3 month penalty, that number is multiplied by three to ($846.18 X 3 = $2,538.55) come up with the total penalty.

- The rate difference for the balance of the term of the loan.

This penalty is also called the rate differential. This penalty is a bit more complex calculating, however it is used when the current rate, which would be in force when you break your contract, is lower than the rate you got when you negotiated the contract. In this scenario, the penalty is computed to represent the difference between the two mortgage interest totals over the rest of the term. For example,

If we have the same mortgage, $200,000 25 year amortized 5 year mortgage with a rate of 5.4%, the monthly mortgage payment is pegged at $1,209.17. If the homeowner breaks the contract after 30 months by prepaying the loan, the lender will charge a penalty because he can now only lend at the current interest rate, which, 30 months after the old loan, will now be at 4.75%.

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