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Information on Mortgage Prepayment
At Peoples Bank, we pride ourselves on being transparent in all situations. We value open communication both internally, as well as with you.
Peoples Bank of Canada (PBC) is dedicated to understanding what you want from your borrowing and to helping you find the right solution to meet your needs. When it comes to your mortgage, PBC offers you the flexibility to pay down your mortgage faster or to pay it off at any time.
Before deciding on your mortgage solution, take a moment to review our prepayment options to ensure your PBC Mortgage suits your specific needs.
Learn more about your options by reviewing our information on mortgage prepayments below.
What is an open mortgage?
An open mortgage can be prepaid, in part or in full, during the term of the mortgage without paying a prepayment charge. The interest rate on an open mortgage is often higher than the interest rate on a closed mortgage. An open mortgage can provide flexibility until you are ready to lock into a closed term.
What is a closed mortgage?
A closed mortgage is one that cannot be prepaid, renegotiated or refinanced before the end of the term without paying a prepayment charge. However, most closed mortgages contain certain prepayment privileges, such as the right to make a prepayment of 20% of the original principal amount each year, without paying a prepayment charge.
A closed mortgage often has a lower interest rate than an open mortgage.
What is a fixed interest rate mortgage?
With a fixed interest rate mortgage, in most cases your interest rate does not fluctuate during the mortgage term. Your regular mortgage payment amount does not change so you know exactly what your regular payments will be and how much of the principal balance will be paid off during the term.
What is porting a mortgage?
Porting a mortgage simply means taking your current mortgage, with its current rates and terms, and transferring it to another property without incurring any prepayment charges. You can port your mortgage if you’re purchasing a new property at the same time you are selling your existing one.
What is an adjustable rate mortgage?
With an adjustable rate mortgage, the interest rate changes when the PBC Prime Rate changes. When that happens, your principal and interest payment will be recalculated based on the new interest rate and remaining amortization.
Why choose a short-term mortgage?
A short-term (1-3 years) mortgage generally offers a lower interest rate than a longer-term mortgage. When current rates are high, and you think rates may drop, choosing a short-term mortgage allows you to lock in for a shorter period. A short-term mortgage may also be a good option if you plan to sell your home or pay off the mortgage early.
Why choose a long-term mortgage?
A long-term (5+ years) mortgage generally offers a higher interest rate than that of a short-term mortgage. When current rates are reasonably low, choosing a longer-term mortgage secures the interest rate for a longer period of time and makes budgeting easier.
How can a mortgage be paid off faster without paying a prepayment charge?
A mortgage is a big commitment. Most mortgages are paid over 25 years, but we have some tips to help you pay yours off faster. Reducing the number of years you make mortgage payments can add up to big savings.
There are several ways to “pay down” your mortgage and get out of debt faster without incurring prepayment charges.
Increase Your Payments
You can increase your initial down payment by up to 20% once a year during the term of your mortgage. By increasing your payments, you can pay the mortgage off faster.
Increase Your Payment Frequency
You can make your regular mortgage payments more often, which saves you money in interest charges over the long run as your principal is paid down faster.
For example, if you made accelerated bi-weekly payments of $415 instead of monthly payments of $830, you could save almost $27,000 in interest over the entire amortization period of your mortgage. This would allow you to pay off your mortgage about 4.5 years sooner.
Make an Annual Prepayment of up to 20%
You have the option of making lump-sum payments to pay down your mortgage faster. To avoid any prepayment charges, your payment must not exceed your allowable prepayment privilege. A lump-sum payment is applied directly to the principal if there is no interest owing. This saves you money over the life of your mortgage.
For example, if you make a $1,000 lump-sum payment annually, you could save almost $28,350 in interest over the entire amortization period of your mortgage. This would allow you to pay off your mortgage about 4 years sooner.
Prepay at Renewal
At the end of each mortgage term, all PBC mortgages are open to pay down as much as you wish prior to renewing into a new term and rate. The amount you prepay will all be applied directly to the principle outstanding without incurring any prepayment charges.
For example, if you chose a 5-year, fixed-rate term, and made a $10,000 lump-sum payment every time your mortgage came up for renewal, you would save about $37,481 in interest over the entire amortization period of your mortgage, allowing you to pay off your mortgage about 6 years sooner.
How can prepayment charges be avoided?
You have a number of options available to prepay your mortgage and avoid prepayment charges:
If you’re selling and buying a new home, your mortgage may have a portability option that allows you to Port your existing mortgage term, outstanding principal balance and maturity date to a new property.
If you’re selling your home, the purchaser may have the option of applying to assume your mortgage with the existing terms and conditions on closing.
When does a prepayment charge apply?
Prepayment charges may apply if you are:
- Renewing your mortgage before the maturity date
- Prepaying more than the amount of your annual prepayment privilege
- Refinancing your mortgage and selecting a new term
- Transferring your mortgage to another lender
- Paying off your mortgage before the maturity date
In all of the above scenarios, the mortgage balance is being prepaid before the maturity date, which may result in a prepayment charge.
How are prepayment charges calculated for a fixed rate closed mortgage?
If you have a fixed rate closed mortgage, your prepayment charge will be the greater of the following:
- Three months’ interest on the amount you are prepaying. Interest will be calculated at your annual mortgage interest rate, plus any discount you received
- The Interest Rate Differential on the amount you are prepaying
What is an interest rate differential (IRD)?
If you prepay your mortgage, you may be charged a prepayment charge. There are different methods for calculating prepayment charges. In some cases, the amount charged is the Interest Rate Differential amount. At PBC, the Interest Rate Differential amount is the difference between the following two amounts:
- Interest over the remaining term of your mortgage, calculated at your current mortgage interest rate, plus any interest rate discount you received.
- Interest over the remaining term of your mortgage, calculated at PBC’s current posted interest rate for the comparison mortgage identified in your mortgage documents.
For a full prepayment, the prepayment charge is calculated on the full amount of the prepayment. For a partial prepayment, the prepayment charge is calculated on the amount of the prepayment that is more than your annual prepayment privilege amount.
How are prepayment charges calculated for adjustable rate closed mortgages?
If you have an adjustable rate closed mortgage, your prepayment charge will consist of three months’ interest on your current mortgage. Interest will be calculated at PBC prime rate.
Examples of prepayment charge calculations
The following illustrates how prepayment charges are calculated. To estimate your prepayment charge, use the PBC Mortgage Prepayment Charge Calculator.
Example of estimating the prepayment charge for an adjustable rate closed mortgage
Sonia has a variable rate mortgage. If Sonia wanted to pay off the entire principal amount, the prepayment charge would be equal to three months’ interest on the entire amount she is prepaying, calculated at the PBC Prime Rate in effect on the date the mortgage payout statement is prepared.
Sonia still owes $60,000.00 on her mortgage. If the mortgage payout statement were prepared today, and if the current PBC Prime Rate is 5.000%, here is how Sonia estimates the prepayment charge to pay off the entire mortgage.
- Step 1: The total amount of the prepayment is $60,000.
- Step 2: The PBC Prime Rate in effect on the date of the mortgage payout statement is prepared. For calculating, 5.000% becomes 0.050
- Step 3: She multiplies the total amount of the prepayment by the interest rate. This is equal to an estimate of one year’s interest ($3,000.00).
- Step 4: She divides the annual interest cost by twelve to get an estimate of one month’s interest ($250.00).
- Step 5: She multiplies one month’s interest by three to get an estimate of three months’ interest. This is an estimate of the prepayment charge ($750.00).
When Sonia pays off her mortgage, she will need to pay an estimated additional amount of $750.00 to pay for the prepayment charge. This is only an estimate. Sonia can inquire regarding the exact amount of her prepayment charge by ordering a payout statement or by calling 877-462-3788.
Example of estimating the prepayment charge for a fixed-rate closed mortgage
Maria has a 5-year fixed-rate closed mortgage. When she arranged the mortgage, she received an interest rate discount of 0.500%. Her existing annual interest rate on her mortgage is 6.500%.
The principal amount she still owes is $100,000. She has two years (or 24 months) left in the term of this mortgage. However, Maria has just inherited some money and wants to pay off the mortgage.
In Maria’s case, the prepayment charge will be the higher of the following two amounts:
- Three months’ interest at her interest rate of 6.500% plus the discount she received of 0.500%, which is equal to 7.000%; or
- The interest rate differential amount
The following shows an estimated prepayment charge for prepaying the full amount of Maria’s mortgage:
Estimate of 3 months’ interest
- Step 1: The amount Maria wishes to pay off is $100,000.00.
- Step 2: Maria’s current interest rate plus the discount she received equals 7.000% for calculating becomes 0.070
- Step 3: The amount Maria wishes to prepay multiplied by her interest rate plus the discount ($100,000.00 x 0.070) equals the estimated annual interest costs ($7,000.00).
- Step 4: The estimated annual interest costs divided by 12 equals an estimate of one month’s interest ($583.33).
- Step 5: 1 month’s interest costs multiplied by 3 equals an estimate of 3 months’ interest. So, an estimate of 3 months’ interest would be $1,749.99.
Estimate of the Interest Rate Differential amount
- Step 1: The interest costs over the term of a mortgage with Maria’s current principal balance of $100,000.00, with her monthly payment amount of $693.47, a term of 2 years (which is the remaining term of Maria’s mortgage) and her interest rate plus the discount that she received, which is 7.000%, would be $13,603.92.
- Step 2: In Maria’s case, we determine that the comparison mortgage is the CIBC 2-year fixed-rate closed mortgage. On the date we prepare the mortgage payout statement, the posted rate for this product is 5.000% (i.e. 0.050).
- Step 3: The interest costs over the term of a CIBC 2-year fixed-rate closed mortgage, with the same principal amount as Maria’s remaining balance of $100,000.00, the same monthly payment amount of $693.47 and our current posted rate of 5.000%, would be $9,567.59.
- Step 4: The interest costs calculated in Step 3 is subtracted from the interest costs set out in Step 1. This is the interest rate differential amount. So, an estimate of the interest differential amount would be $4,036.33.
The Estimated Prepayment Charge
Maria’s prepayment charge is the higher of the estimated three months’ interest costs of $1,749.99 and the estimated interest rate differential amount of $4,036.33.
So, if Maria’s mortgage payout statement was prepared today, an estimate of her prepayment charge would be $4,036.33.
Maria should call PBC Mortgages to find out the exact amount of her prepayment charge. The amount above is only an estimate. Maria can inquire regarding the exact amount of her prepayment charge by ordering a payout statement or by calling 877-362-4788.
The timing of your prepayment, changes in the interest rate and changes in your payment amount can have an impact on the IRD calculation. You can use the PBC Prepayment Charge Calculator to see how these changes affect your prepayment costs.
What additional charges may apply when prepaying a mortgage?
Prepayment penalties include costs associated with the interest rate differential on the amount paid over the preauthorized 20% prepayment allowance.
Mortgage Discharge Fee/Assignment Fee
- A discharge fee and/or assignment fee may be charged for document preparation and registration when the mortgage is prepaid in full.
- If you ask us to transfer your mortgage to another lender, an assignment fee will apply.
Where can I get additional information?
For additional information regarding Mortgage Options and Prepaying Your Mortgage, visit the Financial Consumer Agency of Canada website:
FCAC Home Page