We have assembled this reference guide to make it easy for you to understand details about prepaying a mortgage and what this means to you.

What is the difference between a fixed rate mortgage versus a variable rate mortgage?

With a fixed rate mortgage the interest rate is set for the entire length of the term, whereas a variable rate mortgage may change with market conditions, which is based on a prime rate. A variable rate mortgage is sometimes referred to as a floating rate mortgage.

What is better for me, an open or closed mortgage?

An open mortgage allows you to repay all or part of your mortgage at any time without penalty. Often, interest rates for open mortgages are higher. Closed mortgages cannot be prepaid, renegotiated or refinanced before maturity without you paying applicable penalties.

How do I know whether a longer mortgage term, or shorter term is the right one for me?

Mortgage term refers to the length of time your current agreement is with us, the lender. This agreement will include interest rates and repayment terms, and at the end of the term, the entire balance may be paid off, or the mortgage renewed for another term.

How can I pay off my mortgage faster without being charged a prepayment penalty?

Several options may be available to you, based on the product selected. Some of which are making a lump sum prepayments, increasing regular mortgage payment amounts and making your payments more often by paying weekly or bi-weekly.

Here are some examples (Based on a $150,000 mortgage balance, 5-year term at 4.00%):

Making a lump sum pre-payment ($10,000 applied each year)

Payment Frequency

Monthly

Accelerated Weekly

Accelerated Bi-weekly

Principal & Interest Payment

789.03

197.26

394.52

Interest Paid Over Term

21,526.20

21,043.72

21,065.24

Principal Paid

75,815.60

80,243.88

80,222.36

Closing Mortgage Balance

74,184.40

69,756.12

69,777.64

Increasing a regular mortgage payment ($50 more is applied to each payment)

Payment Frequency

Monthly

Accelerated Weekly (Pro-rated)

Accelerated Bi-weekly

Principal & Interest Payment

789.03

197.26

394.52

Additional Principal Payment

50.00

11.54

23.08

Interest Paid Over Term

27,610.51

27,123.61

27,146.52

Principal Paid

22,731.29

27,164.39

27,141.48

Closing Mortgage Balance

127,268.71

122,835.61

122,858.52

Changing a regular payment from Monthly to Weekly, or Bi-weekly

Payment Frequency

Monthly

Accelerated Weekly

Accelerated Bi-weekly

Principal & Interest Payment

789.03

197.26

394.52

Interest Paid Over Term

27,922.70

27,440.06

27,461.74

Principal Paid

19,419.10

23,847.54

23,825.86

Closing Mortgage Balance

130,580.90

126,152.46

126,174.14

Can I avoid being charged a prepayment penalty if I decide to end my current agreement prior the maturity?

You may minimize a prepayment penalty by choosing to refinance your current mortgage which allows you to renegotiate your current agreement for a increased mortgage balance amount, with a new interest rate and term. Another option available is to port your current mortgage to another property, where all details of your agreement remains the same.

What type of prepayment penalty could I be charged should I decide to pay off my mortgage early (prior to maturity)?

The two prepayment penalty types commonly charged are either a 3 month interest penalty, or an Interest Rate Differential (IRD). IRD is sometimes referred to as Loss of Interest (LOI). The lender will charge the greater of these two (for terms longer than 5 years, the lender can only charge a 3 month penalty).

How is the 3 month interest penalty calculated?

It is calculated by applying the interest rate being charged on your current mortgage, to the outstanding mortgage principal balance, for a 3 month period.

3 Months Interest Penalty

Sample Calculation

Step 1:

(A)

Amount you are paying out

120,000

Step 2:

(B)

Interest Rate on your Loan expressed as a decimal

3.89% = .0389

Step 3:

(C)

A x B = C

4,668.00

Step 4:

(D)

C ÷ 4 = D, D is the estimated Three Months Interest Cost

4668.00/4= 1167.00

Step 5:

(E)

D is your estimated Early Payout Penalty

1,167.00

How does my lender calculate my IRD penalty?

IRD is calculated by taking the difference between your current mortgage’s interest rate and the lender’s posted interest rate for the term closest to the length of time remaining in your term. This difference is then multiplied to the mortgage balance and term. For exact IRD penalty amounts, contact our Customer Service Centre (1-855-795-4489).

Here is an example (estimating the IRD penalty; the lender uses a precise formula):

Interest Rate Differential Penalty Estimate

Sample Calculation

Step 1:

(A)

Interest Rate on your Loan

3.89%

Step 2:

(B)

Current posted interest rate in effect at the time, for a loan offered by us with a term that is closest, to the remaining term of your Loan (see our website or call our Customer Service Centre for rates)

3.19% (Current 3-yr posted rate)

Step 3:

(C)

A – B = C, which is the difference between your Interest Rate and the current posted interest rate for a loan with a term that is similar to your remaining term, expressed as a decimal

3.89%-3.19% = 0.70% = .0070

Step 4:

(D)

Amount you are paying out

120,000

Step 5:

(E)

Number of months remaining in the Term of your Loan

36 months

Step 6:

(F)

(C x D x E) ÷ 12 = F, F is the estimated Interest Rate Differential Amount