Renegotiating Your Fixed Rate Closed Mortgage Interest Rate

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 fixed rate closed mortgage, you will be assessed prepayment charges (also known as breakage costs).

What Are The Benefits of a Fixed Rate Mortgage?

Many clients seeking the security of predictable regular payments and protection from rate fluctuations select a fixed rate mortgage. As the name implies, a fixed rate mortgage offers a specific interest rate that is 'fixed' or locked in for the term of the mortgage. It means you'll know exactly what to expect, including:

• The interest rate of your mortgage
• The amount of your regular mortgage payments
• The portion of your payment that goes toward principal and interest

And the longer you are locked in, the more you'll be protected from potential interest rate increases over the term of your mortgage.

What is a Prepayment Charge for a Fixed Rate Mortgage?

In order to lend you the money at this 'fixed rate' for a set period of time, RBC borrows the funds needed in the market and enters into fixed term contracts. When you break your mortgage term, RBC is charged a 'breakage cost' as that contract will not be fulfilled. Mortgage pre-payment charges are collected from you to partially offset the costs that the bank is charged.

How is the Prepayment Charge Calculated?

The prepayment charge is calculated as either three months interest on your outstanding mortgage balance, or the Interest Rate Differential (IRD), whichever is higher. The IRD is 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.

If you received a discount on the interest rate applicable to your mortgage, that same discount is applied to the calculation. If you received a cash back initially on your mortgage or at renewal, you will have to repay a portion of the cash back amount when you prepay your mortgage in full.

Because the IRD calculation is the difference between your existing mortgage rate and today's rates, if today's rates change, your IRD will also change.

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.