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]
- 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]
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.