Example for a closed, fixed-rate mortgage
Let’s assume you have a mortgage for a five-year term with a 9% interest rate, taking into account the 0.5% reduction in the interest rate you received at the beginning of the current term. You still owe $100,000; however, you have inherited $100,000 and are thinking of using it to pay off your mortgage. You have used all the prepayment options available to you. There are 36 months left before the mortgage maturity date. The current interest rate for a mortgage with a similar term is 6%.
Here’s how you would estimate the charge:
|1. Estimate the cost of three months' of interest|
|Amount you want to pay $100,000 (A)||$100,000 (A)|
|Mortgage interest rate (written as a decimal)||0.09 (B)|
|A x B = C ($100,000 x 0.09 = $9,000)||$9,000(C)|
|C ÷ 4 = D ($9,000 ÷ 4 = $2,250)||$2,250 (D)|
|2. Estimate the interest rate differential|
|Mortgage interest rate (expressed as a percentage)||9% (A)|
|Posted annual interest rate of 6% for a new mortgage with a term that is closest to the remaining term in your existing mortgage less the discount of 0.5% you received on your existing mortgage||5.5% (B)|
|The difference between your existing interest rate and the current rate(A - B = C), written as a decimal||0.035 (C)|
|Amount you want to pay off||$100,000 (D)|
|Number of months left until the mortgage maturity date||36 months (E)|
|(C x D x E) ÷ 12 = F[(0.035 x 100,000 x 36) ÷ 12]||$10,500 (F)|
In this example, we estimate it would cost you $10,500 to pay off your mortgage before the maturity date since this amount is higher than the three months’ interest cost.
Note: This example is based on a formula for estimating the cost of prepaying a mortgage before the end of the term. RBC Royal Bank uses a more complex calculation that will result in a lower charge than the estimate. You will have to contact us for your exact prepayment charge.
Example for a closed, variable-rate mortgage
If you prepay your mortgage before the end of the term, your prepayment charge will be calculated based on three months’ interest on the outstanding amount, which can be calculated using this formula:
Outstanding Balance (or amount you want to prepay) x Your Current Interest Rate x 3 Months
Example for a RateCapper mortgage
If you prepay your mortgage before the end of the term, your prepayment charge will be calculated based on three months’ interest on the outstanding amount using your RateCapper maximum rate, which can be calculated using this formula: Outstanding Balance (or amount you want to prepay) x RateCapper Maximum Rate x 3 Months
It is important to remember that if you received cash back when you got your mortgage or at the time of renewal, you will have to repay a portion of the cash back amount when you prepay your mortgage before the end of the term.