Thinking about refinancing, prepaying a large amount or renegotiating your current mortgage to take advantage of lower interest rates? Before you do, there are several things to keep in mind—the most important one being whether or not you will have to pay the mortgage pre-payment charge.
What is a Mortgage Pre–payment Charge?
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.
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
- three months’ interest on the amount prepaid at the interest rate; or
- 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.
What’s Right for You?
The best way to know whether you can still save money in the long run after paying the mortgage pre-payment charge is to call your current lender and find out the pre-payment penalty.