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
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
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.