Understanding Mortgage Pre-Payment Charges

With interest rates at historical lows, you may be thinking about renegotiating your mortgage rate to take advantage of lower rates. However, if you break your closed term mortgage, you will be assessed a prepayment charge.

Why is there a prepayment charge for a closed-term mortgage?

The purpose of a prepayment charge is to compensate the lender for the economic costs it incurs when a prepayment amount exceeds the prepayment privileges permitted under the mortgage. These costs include prepayment transaction costs, plus the full term amount of interest that was designed, in part, to acquire the mortgage which the lender will not recover when a mortgage is prepaid.

How is the prepayment charge for a Closed Variable Rate or RateCapper Mortgage calculated?

The prepayment charge is 3 months’ interest on the amount prepaid using the

• The Interest Rate if you have a Variable Rate mortgage
• The RateCapper maximum rate if you have a RateCapper mortgage

How is the prepayment charge for a closed fixed rate mortgage calculated?

The prepayment charge for a fixed-rate mortgage is the greater of

1. three months’ interest on the amount prepaid at the interest rate; or
2. interest for the remainder of the term on the amount prepaid, calculated using the "interest rate differential" (IRD).

The interest rate differential is the difference between the interest rate and our posted rate on the prepayment date for a mortgage with a term similar to the time remaining in the term and having the same prepayment options as the mortgage less your rate reduction.

In completing this calculation one of the components used is a financial concept called “present value”. This concept recognizes that interest income to be received in the future is less valuable than the same amount of money received today. The interest rate differential calculation also takes into account the fact the mortgage balance for the remaining term declines on each payment date. The use of these financial concepts in the calculation reduces the amount calculated using the interest rate differential.

Why can the prepayment charge change?

A prepayment charge can change over time due to several factors.

• As the number of months or days remaining in the term of the mortgage changes with each day, it is possible for the “similar term” mortgage used for comparison purposes in the interest rate differential calculation to also change.
• Because the interest rate differential calculation is based on the difference between the interest rate and our posted interest rate on the requested payout date, if the posted rate changes, the interest rate differential calculation will also change.
• If a different payout date is requested, it is possible to have a prepayment charge using the three months’ interest method change to a prepayment charge using the interest rate differential calculation or the reverse because of the factors noted above.
• As the outstanding balance reduces, the prepayment charge could change. This document sets out what options are available for reducing the balance faster. These options may include increasing the amount or frequency of regularly scheduled payments or making an additional payment. Some of these options can only be exercised annually, so please check with us to confirm you can exercise the option by calling 1-800-769-2511. For an example of how the pre-payment charge is calculated click here . This example is based on a formula for estimating the cost of prepaying a mortgage before the end of the term.

Please contact us for the exact cost of prepaying your mortgage. We can give you the precise costs that apply to prepayments with respect to your mortgage.

We can help you tailor a mortgage solution based on your financial needs. If you have more questions regarding renegotiating your rate, contact us 24 hours a day, 7 days a week at 1-800-769-2570 or visit your local branch.