CWB Canadian Western Bank

Mortgage prepayment charges

Know the ins and outs of what you will be charged

Prepayment charges vary depending on the type of mortgage you have. Here are some examples of both fixed rate and variable rate charge.

If you have a closed or convertible fixed rate mortgage and you prepay more than is allowed by your prepayment privileges you will be subject to prepayment charges. You may also be subject to a prepayment charge if you:

  • Refinance your mortgage
  • Pay out your mortgage to transfer it to another lender

For fixed rate mortgages, the prepayment charge is the greater of the two calculations below:

  • Three months’ interest calculated using the interest rate on your mortgage. Use the following calculation to estimate three months’ interest:

[Mortgage amount outstanding] x [Interest rate] x [3 months]
12

OR

  • Interest rate differential. Use the following calculation to estimate the interest rate differential:

[Mortgage amount outstanding] x [Interest rate – Similar mortgage interest rate] x [Number of months remaining in the term of your mortgage]
12

Interest rate differential is the difference between your mortgage rate and the current rate for a mortgage that most closely resembles the remainder of your term (inclusive of any rate discount or premium on your mortgage), multiplied by the mortgage amount outstanding for the remaining time left on your mortgage up to the mortgage maturity date.

Prepayment charges on a fixed rate mortgage may vary over time for the following reasons:

  • Posted mortgage rates change over time. As posted mortgage rates change, this impacts the interest rate differential calculation since it is based off the difference between your annual interest rate and the current posted interest rate of a mortgage that most closely resembles the remainder of your term.
  • You pay down your principal as you make payments. Part of each payment you make goes towards paying down your principal. As you make payments your outstanding mortgage amount decreases. Provided posted mortgage rates do not change significantly, your prepayment charges will also decrease. 

  • The number of months remaining on your mortgage term reduce over time. As you pay down your mortgage, the amount of time remaining on your term decreases, which will impact the interest rate differential calculation.

Using these formulas will give you a good estimate of your prepayment charge. The actual prepayment charge may be slightly higher than the estimated value. For help calculating your prepayment charge, we encourage you to use our Mortgage Prepayment Calculator or call one of our mortgage prepayment specialists at 1.855.665.8826.

Sarah and Keith have inherited a sum of money and want to pay off their mortgage. They still owe $250,000. Sarah and Keith are starting their third year of a 5-year fixed rate mortgage with annual interest rate of 6%, which includes a 0.5% rate discount. They have already used all their prepayment options for the year. To help with the formulas, this information can also be shown as:

Mortgage amount outstanding:

$250,000

Interest rate:

6.00%

Rate discount:

0.5%

Mortgage term remaining:

3 years or 36 months

 

Step 1 – Estimate the cost of three months’ interest:

 (A) Sarah and Keith’s mortgage amount outstanding

$250,000 

 (B) Sarah and Keith’s interest rate (expressed as a decimal):

6.00%
100.00%

 0.06

 (C) Three months' interest equals:

(A) x (B) x 3 Months
12 

=$250,000 x 0.06 x 3 Months
12

 $3,750

 

Step 2 – Estimate the interest rate differential:

 Part 1: Calculate the difference between Sarah and Keith’s interest rate and the current rate

 (A) Sarah and Keith’s interest rate (expressed as a decimal):

6.00%
100.00%

 0.06

 (B) The current posted annual interest rate for a 3-year fixed term mortgage, less the discount Sarah and Keith received on their mortgage (expressed as a decimal):

4.00%
100.00%

 0.04

 (C) The difference between the two interest rates:

(A) – (B) = 0.06 – 0.04

Note: If the difference between the two interest rates is less than zero, this amount will be rounded up to zero for the purposes of the interest rate differential calculation. As a result, the prepayment charges will be based on three months’ interest.

 0.02

 

 Part 2: Calculate the interest rate differential
 (D) Sarah and Keith’s mortgage amount outstanding

 $250,000

 (E) Number of months remaining on Sarah and Keith’s mortgage

 36

 (F) Calculate the interest rate differential:

(D) x (C) x (E)
12

= $250,000 x 0.02 x 36
12

$15,000 

Sarah and Keith will have a prepayment charge of approximately $15,000 since the amount of the interest rate differential at $15,000 is greater than three months’ interest at $3,750.

*Rates used above are for illustrative purposes only.

Glossary:

  • Mortgage amount outstanding: The remaining balance, or principal, to be paid on your mortgage as of today's date.
  • Current interest rate: Your annual interest rate. For fixed rate mortgages, the interest is compounded semi-annually and calculated half-yearly, not in advance.
  • Similar mortgage interest rate: The current rate for a mortgage that most closely resembles the remainder of your term (inclusive of any rate discount or premium on your mortgage), multiplied by the mortgage amount outstanding for the remaining time left on your mortgage up to the mortgage maturity date.

 

 

If you have a closed or convertible fixed rate mortgage and you prepay more than is allowed by your prepayment privileges you will be subject to prepayment charges. You may also be subject to a prepayment charge if you:

  • Refinance your mortgage
  • Pay out your mortgage to transfer it to another lender

For variable rate mortgages, the prepayment charge is three months’ interest calculated using the interest rate on your mortgage. Use the following calculation to estimate three months’ interest:

[Mortgage amount outstanding] x [Interest rate] x [3 months]
12

Prepayment charges on a variable rate mortgage will decrease as you make payments. Part of each payment you make goes toward paying down your principal and, as a result, decreases your prepayment privilege over time.

Using this formula will give you a good estimate of your prepayment charge. The actual prepayment charge may be slightly higher than the estimated value. For help calculating your prepayment charge, we encourage you to use our Mortgage Prepayment Calculator or call one of our mortgage prepayment specialists at 1.855.665.8826.

Judy and Chris were recently married and their parents gifted them a large sum of money for a new house. Judy currently owns her own home and plans to sell it when she and Chris find their dream house. Judy has a variable rate mortgage with an annual interest rate of 4%. She still owes $150,000 on her mortgage. Judy investigates how much it would cost to pay off her variable rate mortgage.

Mortgage amount outstanding: $150,000
Interest rate: 4.00%

To estimate the prepayment charge of three months’ interest:

(A) Judy’s mortgage amount outstanding

$150,000

(B) Judy’s interest rate(expressed as a decimal):

4.00%
100.00%

0.04

(C) Three month’s interest equals:

(A) x (B) x 3 Months
12

=$150,000 x 0.03 x 3 Months
12

$1,500

 If Judy chooses to pay down her mortgage when she sells her house, she will pay a prepayment charge of approximately $1,500.

*Rates used above are for illustrative purposes only.

Glossary:

  • Mortgage amount outstanding: The remaining balance, or principal, to be paid on your mortgage as of today's date.
  • Current interest rate: Your annual interest rate. For variable rate mortgages, the interest rate is compounded monthly, not in advance

 

Prepayment charges questions?

Stop by your local branch or call one of our mortgage prepayment specialists at 1.855.665.8826.

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