Mortgage Prepayment Q&A
What is a Fixed-Rate Mortgage?
Fixed rate refers to the fact that the interest rate remains the same over the term of the mortgage. This is in contrast to other types of mortgages like “variable rate mortgage” in which the interest rate may change. If customers have a set budget and want to have a predictable payment from month to month, then a fixed-rate mortgage might work well for you.
What is a Variable rate mortgage?
A variable rate mortgage will fluctuate with the Prime rate throughout the mortgage term. While regular payment will remain constant, interest rate may change based on market conditions. This impacts the amount of principal customers pay off each month. When rates on variable interest rate mortgages decrease, more of regular payment is applied to principal. Additionally if rates increase, more of payment will go toward the interest.
What is an Open Mortgage?
The whole or any part of the principal amount of the mortgage loan may be prepaid at any time without notice or bonus interest. All accrued interest owing up to and including the date of prepayment must be paid at the time of such principal prepayment.
What is a closed mortgage?
When not in default, and after having exercised the prepayment options described below, the mortgage loan may be prepaid at any time during the term upon payment of 3 months' bonus interest at the contracted interest rate, or the interest differential, whichever is higher.
Difference between Long-term mortgages and short-term mortgages?
Short-term mortgage usually refer to the mortgage with the six months or one year term contract, long-term mortgage means the contract term usually more than five years.
What is a prepayment charge?
If you decide to pay off your outstanding balance before your term's maturity date, (or even an amount greater than your allowable prepayment privileges), you may have to pay a prepayment charge.
How to use "15 + 15" Prepayment and Increasing Payment Option:
- In addition to making the scheduled repayments, the borrower may, when not in default, thrice during a 12-month period (from anniversary date to anniversary date of the interest adjustment date) on a scheduled repayment date, prepay up to a cumulative amount of 15% of the original principal amount of the mortgage without notice or bonus interest. Such prepaid amounts are applied to the principal only and will not affect the monthly payment amounts. The minimum amount of such prepayment is CAD5,000.
- Once during a 12-month period (from anniversary date to anniversary date of the interest adjustment date), the borrower may, on written notice increase the regular payments of the principal and interest payable under the mortgage by up to 15%.
What is a Amortization?
Amortization is a term for the number of years that customers take to fully pay off mortgage (not the same as mortgage term). The Our Bank offers up to 25-year amortization period for conventional mortgage loans.
How prepayment charges are calculated:
- For fixed interest rate:
The prepayment charge is the greater of either: three months' interest, or an Interest Rate Differential (IRD) amount, equivalent to the difference in the interest payable on your existing mortgage versus that payable on a replacement mortgage, calculated on the time remaining in your existing mortgage term. The interest rate for the replacement mortgage in this calculation is today’s rate of a mortgage that is closest to the remainder of your term.
- For variable interest rate:
The prepayment charge is three months’ interest cost on the amount you want to pay, calculated at the interest rate applicable to your mortgage when you make the prepayment.
How to estimate Three Months' Interest (90 days)
Step 1: ________ (A) The amount you want to prepay
Step 2: ________ (B) Your current annual interest rate expressed as a decimal (for example, 6.75% = .0675)
Step 3: ________ (C) A x B = C
Step 4: ________ (D) C ÷ 4 = D
D = Your estimated three months' interest amount
How to estimate the Interest Rate Differential Amount
Step 1: ________ (A) Your current annual interest rate expressed as a decimal (for example, 6.75% = .0675)
Step 2: ________ (B) The posted interest rate for a Similar Mortgage, less any rate discount received by you under the Mortgage
Step 3: ________ (C) A - B = C, which is the difference between your current annual interest rate and the interest rate in B above (write C as a decimal)
Step 4: ________ (D) The amount you want to prepay
Step 5: ________ (E) The number of months remaining on the term of your Current Mortgage
Step 6: ________ (F) C x D x E) ÷ 12 = F
F = Your estimated Interest Rate Differential amount
Please be advised that estimated cost of prepayment provided above will be different with the exact cost of prepayment due to the customer’s specific situation and actual formula employed.
For more information about mortgage prepayment, you can refer to the Website of FCAC:http://www.fcac-acfc.gc.ca/eng/consumers/mortgages/index-eng.asp