CWB Optimum Mortgage

Understanding fixed rate mortgages

Locked-in security and competitive interest rates.

Client handshake
  • Enjoy peace of mind about future interest rate fluctuations during your mortgage term.
  • Know the exact amount of your monthly payments and what portion will go towards principal versus interest.
  • Understand how long it will take to pay off your mortgage.

The clients:

  • 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 in their second year of a 5-year fixed rate mortgage with annual interest rate of 6%.
  • Their prepayment options for the year are already used.

 Mortgage amount outstanding:             $250,000 

 Interest rate:                                          6.00%

           Mortgage term remaining:                      3 years or 36 months

The solution:

Step 1: Calculate 1% of the mortgage amount outstanding.  

(A) Sarah and Keith’s mortgage amount outstanding

$250,000

(B) 1% (expressed as a decimal)

0.01

(C) 1% of the mortgage amount outstanding = (A) x (B)

$2,500

 

Step 2: 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%

0.06

(C) Three month’s interest equals

(A) x (B) x 3 Months  =  $250,000 x 0.06 x 3 Months
         12                                             12

$3,750

 

 ­Step 3: 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%

0.06

(B) The current posted annual interest rate for a 3-year fixed term mortgage (expressed as a decimal)

4.00%
100%           

0.04

(C) The difference between the two interest rates

(A) – (B)  =  0.06 – 0.04

0.02

 * If the difference between the two interest rates in (C) is less than zero, this amount will be rounded up to zero for the purposes of the interest rate differential calculation.

 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)  =  $250,000 x 0.02 x 36 
          12                              12

$15,000

 

The result:

  • The interest rate differential of $15,000 is greater than three months’ interest of $3,750.
  • As result, $15,000 is the figure that should be used in calculating the prepayment charge.
  • Prepayment charge = 1% of the mortgage amount outstanding ($2,500) + the interest rate differential ($15,000) = $17,500.

 

Sarah and Keith will have a prepayment charge of approximately $17,500 because the amount of the interest rate differential at $17,500 is greater than three months’ interest at $3,750.

A fixed rate offers:

  • A competitive, locked-in interest rate that won’t change during your term.
  • Set payments that won’t change during your term.
  • Peace of mind to stay on budget.
What are my payment frequency options?
  • You can make bi-weekly, accelerated bi-weekly or monthly payments.
  • If you choose monthly payments, you can also select the day of the month that your mortgage payment is due.
What are my privileged payment options?
  • Pay a lump sum of up to 20% of your original mortgage amount once per calendar year.
  • Increase the amount of your regular payments by up to 20%.
  • Double up your regular payments:
        • Your regular principal and interest payments will increase.
        • More money will be put toward paying down your principal balance.
  • How can I change my banking information to make payments?
    • Provide us with a copy of a void cheque and/or a bank authorization form stamped by your bank.
    • Allow a minimum of ten business days prior to your next payment date for your change to be processed.
    What is the difference between a discharge fee versus a payout statement?

    A discharge fee is:

    • An administration fee.
    • Used to process the payout and any subsequent documentation.
    • Subject to provincial guidelines.

    A payout statement is:

    • A snapshot of your mortgage balance, accrued interest, arrears, prepayment charges, etc.
    • Used to show the amount required to pay your mortgage off.

    Should you payout your mortgage, then mortgage discharge documents will be created to discharge the mortgage off title.

    How can I get a lower interest rate?
    • Lock in a competitive interest rate through a fixed rate mortgage.
    • Decrease your long-term interest charges with a variable rate mortgage.
    • Blend and extend your mortgage rate—blend the rate on your existing mortgage with the rate of the extended term.
    • If you own equity in your home, take advantage of a home equity line of credit for a flexible mortgage solution that can change as your needs change.

    If you have a closed term, fixed rate mortgage and you prepay more of your mortgage 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.

    How to calculate prepayment charges

    For fixed rate mortgages, the prepayment charge is equal to 1% of the mortgage amount outstanding plus the greater of the two calculations below.

    1: Estimating three months’ interest

    Mortgage amount outstanding x current interest rate x 3 Months

    12                                                        

    OR

     

    2: Using the interest rate differential.  

    Mortgage amount outstanding x [current interest rate – similar mortgage interest rate] x number of months remaining in the term of your mortgage 

                                12  

    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. Calculate your estimated prepayment charge using our Prepayment Calculator.

    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, multiplied by the mortgage amount outstanding for the remaining time left on your mortgage (up to the mortgage maturity date).

    Prepayment charges may change because:

    • Posted mortgage rates change over time. As posted mortgage rates change, your interest rate differential (IRD) is impacted. This is because your IRD is based on 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 mortgage amount outstanding decreases. Provided that posted mortgage rates do not change significantly, your prepayment charges will also decrease.         
    • The number of months remaining on your mortgage term reduces over time. As you pay down your mortgage, the amount of time remaining on your term decreases, impacting your IRD calculation.