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Mortgage Prepayment Q&A


 

What is a down payment?

Your mortgage down payment is the portion of your home purchase price that you pay upfront yourself. The amount of your down payment (which represents your financial stake or the equity in your new home) should be determined before you start house-hunting.

The larger your down payment, the less your home will cost you in the long run. With a smaller mortgage, your interest costs will be lower and over time this will add up to significant savings.

What is the difference between a fixed rate mortgage and a variable rate mortgage?

A fixed rate mortgage gives you the security of locking in your interest rate for the full term of your mortgage, so that you don't have to think about interest rate fluctuations. The interest rate and the payments on the mortgage remain the same for the length of your term. As you make payments and the principal amount is reduced, more of the mortgage payment is applied to the principal and less of the payment is applied to the interest. Because the interest rate does not change throughout the term, you know in advance the amount of interest you will pay and how much principal you will owe at the end of your term.

With a variable rate mortgage the interest you pay fluctuates based on the Bank’s Prime Rate. The regular mortgage payment is a fixed amount. As interest rates fall more of the payment is applied to the principal, and as rates rise, more of the payment is applied to the interest. Because the interest rate may change, it is not possible to know in advance how much interest you will pay and how much principal you will owe at the end of your term.

What is the difference between a closed term mortgage and an open term mortgage?

A closed mortgage contains certain restrictions on the amount you can prepay on your mortgage balance. If you pay off your mortgage before the end of the term, or prepay more than is allowable according to the mortgage prepayment options set out in your Mortgage Loan Agreement, you may have to pay a prepayment charge.

An open mortgage term can be repaid in part or in full any time without paying a prepayment charge. Interest rates for open mortgages are generally higher than for closed mortgages because of the added pre-payment flexibility.

What are amortization and mortgage term?

Amortization is the estimated number of years it will take to pay off your mortgage. Amortization periods range up to 30 years. The longer your amortization is, the lower your mortgage payments will be, but the higher the total amount of interest you'll pay over the life of the mortgage.

Mortgage term is the length of time you agreed to a certain mortgage interest rate and a specified payment schedule, When the term expires, the balance of the principal is either repaid in full or the mortgage is renegotiated at then-current market rates and conditions.

You may have several mortgage terms during the amortization period.

My mortgage is up for renewal, what should I do?

This means that your mortgage term has come to an end and you can renegotiate for a new interest rate, term, and payment schedule. This is also the time to make a larger payment (lump sum payment) without pre-payment penalties on your mortgage to help pay it off sooner.

Why is there a prepayment charge for a closed-term mortgage?

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. These costs include prepayment transaction costs, plus the full term amount of interest that was designed, in part, to acquire the mortgage which the lender will not recover when a mortgage is prepaid.

How to estimate prepayment costs?

- For fixed interest rate:

After having exercised your prepayment privileges (refer to your newest facility letter) available for the current term, the cost of paying off all or some of the remaining principal amount of your closed mortgage before the maturity date is the higher of these two amounts:

- three months’ interest costs on the amount you want to pay

 Or

- the interest rate differential amount. This amount is the difference between your existing mortgage interest rate and the interest rate currently charged for a mortgage similar to yours minus the discount (if any) your received on your existing mortgage that has been deducted from the Bank’s posted rate. A mortgage similar to yours has a term that is closest to the remaining term of your existing mortgage.

1) To estimate Three Months' interest

Change your yearly interest rate for a percent to a decimal. For example 6% = .06; 12% = .12.  Multiply this number by the amount you want to pay. Then, divide the result by 4. The answer is the estimated three moths’ interest cost.

Step 1: 

(A) - amount you want to pay

(B) - mortgage interest rate expressed as a decimal

(C) - A x B = C

Step 2: 

(D) - C ÷ 4 = D, estimated three months’ interest costs

2) To estimate the interest rate differential amount

Follow these steps to estimate the interest rate differential amount

Step 1: 

(A) - annual interest rate on your mortgage

(B) - current annual interest rate for a new mortgage with a term that is closest to the remaining term in your existing mortgage (less any discount you received on your existing mortgage)

(C) - A – B = C, which is the difference between your existing interest rate and the current rate.  Write C as a decimal.  For example 6% = .06.

(D) - Amount you want to pay off

Step 2: 

(E) - Number of months left until your mortgage maturity date

(F) - (C X D X E) ÷ 12 = F, estimated interest rate differential amount  

The estimated cost of paying off all, or some, of the principal amount remaining on your   mortgage before the mortgage maturity date will be the larger number that results from the calculations in (1) and (2).   

- For variable interest rate:

After having exercised your prepayment privileges(refer to your newest facility letter) available for the current term, The cost of paying off all or some of the remaining principal amount of your closed mortgage before the maturity date is three months’ interest costs on the amount you want to pay.

To estimate the three months' interest cost

Change your yearly interest rate from a percent to a decimal.  For example, 6% = .06; 12% = .12.  Multiply this number by the amount you want to pay.  Then, divide the result by 4.  The answer is the estimated three months' interest cost.

Step 1: 

(A) - amount you want to pay

(B) - mortgage interest rate expressed as a decimal

(C) - A x B = C

Step 2: 

(D) - C ÷ 4 = D, estimated three months’ interest costs

The estimated cost of prepayment provided above may be different with the exact cost of prepayment due to the customer’s specific situation and actual formula employed.

Please contact us at 1-844-669-5566 (toll-free) regarding above information and description of the components for the exact cost of paying off some or all of the principal amount of the mortgage before the mortgage maturity date.  We can quickly give you the precise costs that apply to early payments with respect to your mortgage. The amounts you calculate in above are only estimates and are likely to be higher than the actual cost of pre-payment. 

For more information about mortgage prepayment, you can refer to the Website of FCAC:

http://www.fcac-acfc.gc.ca/Eng/forConsumers/topics/mortgages/Pages/PayingOf-Rembours.aspx.

 

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