How is the penalty for early payout of a mortgage determined according to the Interest Act?

The penalty for early payout of a mortgage, as outlined in the Interest Act, is determined by a specified number of months' interest. This method provides a clear and predictable way for both lenders and borrowers to understand the financial repercussions of paying off a mortgage early. The penalty is often calculated using the outstanding balance of the mortgage and the interest rate, allowing for a straightforward measurement that is consistent and easy to interpret.

This approach benefits borrowers by ensuring that the penalty is related directly to the interest they would owe, rather than being arbitrary or excessively punitive. Furthermore, it provides lenders with a means to mitigate potential losses that arise from the early termination of a mortgage agreement, as they may have relied on those interest payments for loan profitability.

While the other options may seem plausible, they do not align with the framework established in the Interest Act. A fixed fee might not reflect the varying amount of interest owed based on the loan's remaining balance and interest rate. Similarly, basing the penalty on market interest rates could introduce significant variability and uncertainty for borrowers, making it less transparent. The notion that it varies with the loan amount also does not capture the standardized nature of penalties outlined in the legislation, which focuses primarily on the interest calculation rather than the principal amount directly.