The Early Payout and the Prepayment Charge
Sofia's client, Raj, has a $420,000 mortgage at 4.9% with 26 months remaining on a five-year fixed term. He is selling his home and wants to close 14 months early. The lender's prepayment charge is the greater of three months' interest or the interest rate differential (IRD). The lender calculates IRD using its posted rate (6.4%) minus the discounted rate (4.9%) = 1.5%, applied to the remaining 26 months on the full balance. Raj's broker, Sofia, calculates three months' interest as roughly $5,145 and the lender's IRD figure as roughly $13,650, so the lender will charge the larger amount. Raj asks whether he can avoid the charge by porting the mortgage to his new home, which he is buying for $510,000 with a new $480,000 mortgage.
1. Explain which charge applies and whether porting avoids it. Show the reasoning.
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Which charge applies: The contract says greater of three months' interest or IRD. Three months' interest on $420,000 at 4.9% is approximately $420,000 × 0.049 × 3/12 = $5,145. The lender's IRD figure is roughly $13,650. The greater is the IRD, so Raj faces about $13,650 if he pays out without porting.
Does porting avoid it? Porting moves the existing mortgage terms to a new property, so a straight port typically avoids the prepayment charge - but only if the ported amount and new funds fit the lender's rules. Here the new mortgage is $480,000 versus the existing $420,000, so $60,000 is new money. Lenders commonly blend the ported balance with new funds (a blended rate and term) or treat the new money separately. The prepayment charge is generally avoided only on the ported portion; the new $60,000 is a fresh advance with its own terms.
Conclusion: Raj avoids the ~$13,650 IRD only if he ports within the lender's porting window and the blended structure is acceptable. Sofia should confirm the porting deadline (often tied to sale/purchase dates), whether the full $420,000 can port, and the rate on the new $60,000.
2. How should Sofia advise Raj if the port is not available in time?
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If the port cannot be completed within the lender's window, Sofia should:
- Quantify the cost - confirm the IRD figure in writing from the lender, since IRD calculations vary and errors are common.
- Compare options - paying the ~$13,650 IRD versus a bridge or short extension to preserve the port; sometimes a brief delay or a bridge loan costs less than the IRD.
- Check the porting conditions - some lenders allow the port to be completed after closing within a stated period, or allow a 'port and blend' with a rate hold.
- Model the blended payment - show Raj the new payment on $480,000 at the blended rate so he understands the trade-off between avoiding the IRD and accepting a blended rate.
- Disclose - document that Raj was told the IRD applies if the port fails, so he can make an informed choice.
The goal is to let Raj compare the IRD against the blended-rate cost, not to assume porting is free.