Mortgage penalties: How to calculate late penalties?


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Calculating mortgage-related penalties can help you anticipate certain unforeseen charges. When taking out a contract, few people ask about the costs incurred by late payment. Yet this step is essential, to ensure you can cope with this situation.

What are late payment penalties on a mortgage?

Late payment penalties are charges imposed by the lending organization, when you fail to pay by the due date. On your contract, the payment of principal and/or interest repayments is indicated. If you're not solvent or don't pay, you'll have to pay these penalties.
In general, late payment penalties are proportional to the duration of the loan. Their amount varies, from one bank to another and even from one contract to another.

Reminder charges

Reminder charges are the fixed charges, which make up late payment penalties. It's a cost you'll have to pay, regardless of the time between the scheduled payment date and when you actually pay.
Beware, in most banks, simply sending a letter to notify you of the delay is charged.

The amount of interest on arrears

In addition to these reminder charges, there's also what's known as interest on arrears. This is interest that is added to the interest rate originally set for your credit. In a way, it serves to compensate the bank for the damage suffered when your payment is late.

Why do banks apply late payment penalties?

In order to lend you money, your bank itself borrows capital on the financial markets. It then draws up a kind of forecast, to find out its profit on the operation.
When you don't repay them on time, you create a cash flow imbalance. To repay its own loan, your bank will then have to use other capital belonging to it. More than a punishment, mortgage penalties are therefore intended to cover the banks in the event of late payment.

Why should you be interested in late payment penalties?

Anticipating a late payment

If you know that financial difficulties lie ahead, it can be useful to calculate your late payment penalties. This can help you find out whether your available capital allows you to cover them. It's relevant to know how long the delay may last, so you can make the most reliable penalty calculation possible.

What calculation to use to anticipate late payment penalties?

To calculate the amount of your late payment penalties, use the following formula:
Amount of late payment penalties = (The amount due x (rate applicable over the period + moratorium rate)) x (number of days late/365) + reminder charges
If you want an exact result, you can get in touch with your bank advisor. He or she will be able to help you calculate the charges incurred. He or she can also help you anticipate the late payment situation. Calling in a financial advisor may be a good idea, to try and find solutions.

The collection procedure

If you fall into arrears and are unable to pay, you run the risk of a collection procedure. Be aware that the costs incurred by this procedure are at the debtor's expense. You will therefore have to pay them, in addition to your debt.
Remember that with a mortgage, your property is used to secure part of your loan. If you are unable to repay your bank, it is therefore possible that it will be sold, to enable you to repay your debt.
Valery Chantepy
Updated on: 31.01.2024Written by Valery ChantepyHead of mortgage department at Comparea
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