First things first, what’s a prepayment penalty?
A prepayment penalty is a fee that you, as the mortgage borrower, pay if you change your mortgage contract term prior to maturity. This includes paying off your entire mortgage early or putting down a lump sum payment. The penalty varies depending on the type of mortgage you have – keep in mind, this can change over time so it’s a good idea to review your most recent prepayment schedule to learn how your mortgage could be affected.
Now that you know what a prepayment penalty is, let’s breakdown what it looks like for each of the different mortgage options:
(owner-occupied only)
With a Straight Rate mortgage, you can make one prepayment each calendar year. The payment can’t be more than 15% of the original principal balance of your mortgage. Anything beyond this amount would result in paying a prepayment penalty.
If you’re selling your home, the prepayment fee will be waived if the following conditions are met:
- you obtain a new Straight Rate closed mortgage with us on your next residential purchase
- the amount of the new mortgage is equal to the mortgage you’re paying out
- the new mortgage has the same rate and term that’s remaining as of the payout date of your current mortgage. If the new mortgage amount is greater than the paid-out mortgage, a blended rate will occur; if the new mortgage is less, a penalty will apply on the difference
(owner-occupied or vacation home only)
With a CU Flex mortgage, there’s no limit to the amount you can prepay as long as the funds you’re using are your own. For example, you can’t use proceeds from the sale of your home or a loan to make a prepayment. Another added feature of the CU Flex is the ability to increase your regular payments to any amount you’d like!
If you’re unsure if a penalty would apply in your situation, give us a call.
Prepayments on a Variable mortgage work the same as a Straight Rate mortgage. You can make one lump sum prepayment each calendar year and it can’t be greater than 15% of the original principal balance of your mortgage.
Saving up to make a lump-sum payment can be a challenge. Thankfully, one of the awesome features of the Variable mortgage is the ability to increase your regular payments up by 15%. Boosting your regular payment amounts will help you pay down your mortgage quicker!
How are prepayment penalties calculated?
Prepayment penalties are calculated in one of two ways: (It’s important to note, you’ll pay the greater amount of the following calculations.)
Three-month interest penalty
Based on the amount you prepaid at the interest rate on your mortgage contract, your prepayment penalty equates to three months’ worth of interest.
Interest rate differential (IRD)
This is the difference between:
- the current interest rate on your mortgage; and
- the current posted mortgage rate, less any discount received at the time of negotiating your mortgage term.
The posted mortgage rate is based on a closed term and determined based on the date the prepayment was made or the issue of a discharge statement, whichever is earlier.
Remember, prepayment fees can change over time for several reasons:
- The remainder of the mortgage term changes each day – meaning, the “similar term” mortgage used for comparison purposes in the interest rate differential calculation may also change.
- Since the interest rate differential calculation is based on the difference between the interest rate and our posted interest rate on the requested payout date, the figure may change if the posted rate changes.
- If the payout date changes, it’s possible that your prepayment penalty method may change too. For example, it may change from a three-month interest penalty to an IRD calculation based on the factors noted above.
If you’re thinking about making a prepayment on your mortgage, give us a call at 1.866.863.6237 or book an appointment online. We’ll walk you through your prepayment options based on your mortgage, so you’re not surprised with a penalty.