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After 5 years, Rob has sold a few more records and has saved enough money to pay off the rest of the balance owing on his mortgage
After 5 years, Rob has sold a few more records and has saved enough money to pay off the rest of the balance owing on his mortgage. He decides that he would like to be mortgage-free. He asks his bank for the payout amount.Bank of Nova Scotia cites the payout amount as $225,000 + $2,500 interest penalty = $227,500. The interest penalty of $2,500 amounts to an additional 3 months of interest for Rob. Rob asks the Bank of Nova Scotia what the interest penalty is for. Royal Bank of Canada says "Don't Wonder Why". Stevie, though realizing he is stuck having to pay the interest penalty, responds by saying "Cash In Your Face!" What enables the Bank of Nova Scotia to charge an additional 3 months of interest? (2 points)
Expert Solution
In the current scenario Mr. Rob has actually done a prepayment of Mortgage Loan i.e. has made the payment before the due date for it and hence Bank of Nova Scotia has charged $2500 as interest on such prepayments. Pre payments actually results into loss of income/Reveue for the bank and hence banks are having clause of prepayment penalty in the loan agreement wherein Mr. Rob might have agreed that in case of early payment then the schedule period he will be liable to make 3months interest payment.
Hence if stated in the mortagage agreement related to prepayment clause Mr. Rob is liable to make such payment of interest to the bank.
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