Due to recent Federal legislation, we have assembled a reference guide to make it easy for you to understand details about prepaying a mortgage and what this means to you.
With a fixed rate mortgage the interest rate is set for the entire length of the term, whereas a variable rate mortgage may change with market conditions, which is based on a prime rate. A variable rate mortgage is sometimes referred to as a floating rate mortgage.
An open mortgage allows you to repay all or part of your mortgage at any time without penalty. Often, interest rates for open mortgages are higher. Closed mortgages cannot be prepaid, renegotiated or refinanced before maturity without you paying applicable penalties.
Mortgage term refers to the length of time your current agreement is with us, the lender. This agreement will include interest rates and repayment terms, and at the end of the term, the entire balance may be paid off, or the mortgage renewed for another term.
Several options may be available to you, based on the product selected. Some of which are making a lump sum prepayments, increasing regular mortgage payment amounts and making your payments more often by paying weekly or bi-weekly.
Click here to see our prepayment calculator website.
Here are some examples:
You may minimize a prepayment penalty by choosing to refinance your current mortgage which allows you to renegotiate your current agreement for a increased mortgage balance amount, with a new interest rate and term. Another option available is to port your current mortgage to another property, where all details of your agreement remains the same.
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). Click here to see our website or call our Customer Service Centre (+1.866.550.8227).
It is calculated by applying the interest rate being charged on your current mortgage, to the outstanding mortgage principal balance, for a 3 month period.
Here are some examples:
|3 Months interest penalty||Sample Calculation|
|Step 1||(A)||Amount you are paying out||$120,000.00|
|Step 2||(B)||Interest Rate on your Loan expressed as a decimal (ie. 3.89% = .0389)||3.89% = .0389|
|Step 3||(C)||A x B = C||$4,668.00|
|Step 4||(D)||C ÷ 4 = D, D is the estimated Three Months Interest Cost||$4,668.00/4=|
|Step 5||(E)||D + Reinvestment Fee (if applicable) = E, E is your estimated Early Payout Penalty||$1,167.00|
Interest rate differential (IRD) is calculated by the difference in the rate set out in your Mortgage or renewal and Radius' lowest rate offered by our Servicing Agent for the term remaining, calculated over the term remaining. For remaining partial terms, the shorter term will apply, e.g. for a remaining term of 1 year 9 months, 1 year rate will apply. For exact IRD penalty amounts, contact our Customer Service Centre (+1.866.550.8227).
Here is an example (estimating the IRD penalty; the lender uses a precise formula)
|IRD penalty estimate||Estimated Calculation|
|Step 1||(A)||Interest Rate on your Loan||3.89%|
|Step 2||(B)||Radius’ lowest rate offered by our Servicing Agent. For remaining partial terms, the shorter term will apply ( click here to see our website or call our Customer Service Centre for rates)||3.19% (current 3yr rate offered b our Servicing Agent)|
|Step 3||(C)||A - B = C, which is the difference between your Interest Rate and Radius’ lowest rate offered by our Servicing Agent for the term remaining, calculated over the term remaining, expressed as a decimal (ie. 1.13% = .0113)||3.89% - 3.19% = 0.70% =.0070|
|Step 4||(D)||Amount you are paying out||$120,000.00|
|Step 5||(E)||Number of months remaining in the Term of your Loany||45 months|
|Step 6||(F)||(C x D x E) ÷ 12 = F, F is the estimated Interest rate Differential Amount||(.0070 x $120,00 X 45) / 12 = $3150.00|
|Step 7||(G)||F + Reinvestment Fee (if applicable) = G, G is your estimated Early Payout Penalty||$3,150.00 + 300.00= $3,450.00|