How it is calculated
The two prepayment penalty types commonly charged are either a 3 month interest penalty, or an Interest Rate Differential (IRD). IRD is sometimes referred to as Loss of Interest (LOI). The lender will charge the greater of these two (for terms longer than 5 years, the lender can only charge a 3 month penalty, after the 5th year).
The IRD is the difference in the interest payable on your existing mortgage versus that payable on a replacement mortgage, calculated on the time remaining in your existing mortgage term. Because the IRD calculation is the difference between your existing mortgage rate and today's rates, if today's rates change, your IRD will also change.
The 3 month interest penalty is calculated by applying the interest rate being charged on your current mortgage, to the outstanding mortgage principal balance, for 3 months.
For the exact prepayment charge, please contact us.Prepayment Charge Calculation Example:
Here is an example to illustrate the cost of paying off a mortgage before the maturity date. The mortgagors have a 5 year term mortgage at an interest rate of 5.0% and an outstanding principal balance of $150,000. There are 36 months left before the mortgage maturity date. The reinvestment rate for a 3 year term mortgage today is 3.19%.
First – Calculate the cost of three months of interest:
| Step 1 | |
|---|---|
| Amount they want to pay off | $150,000 (A) |
| Mortgage Interest Rate (expressed as a percentage) | 5% |
| Mortgage interest rate written as a decimal | .05 (B) |
| A x B = C ($150,000[A] x .05[B] = $7,500 [C]) | $7,500 (C) |
| Step 2 | |
| C divided by 4 = D, ($7,500[C] divided by 4 = $1,875[D]) (estimated three months' interest costs) | $1,875 (D) |
Next – Calculate the cost of the Interest Rate Difference
The Interest Rate Difference (IRD) is the difference in the interest payable on your existing mortgage versus that payable on a replacement mortgage, calculated on the time remaining in your existing mortgage term. Because the IRD calculation is the difference between your existing mortgage rate and today's rates, if today's rates change, your IRD will also change.
| Step 1 | |
|---|---|
| Mortgage interest rate (expressed as a percentage) | 5% (A) |
| Reinvestment rate for a new mortgage based on the remaining term in the existing mortgage | 3.19% (B) |
| A - B = C, the difference between their existing interest rate and the current rate, written as a decimal | 0.0181 (C) |
| Amount they want to pay off | $150,000 (D) |
| Step 2 | |
| Number of months left until the mortgage maturity date | 36 Months (E) |
| (C x D x E) divided by 12 = F (.0181(C) x 150,000 (D) x 36 (E)) divided by 12 = $8,145 | $8,145 (F) |
In this example, it would cost the mortgagors $8,145.00 to pay off their mortgage before the maturity date, since this amount is higher than the three months' interest costs.
We can give you the precise costs that apply to prepayments with respect to your Mortgage.