Zoocasa
Real Estate Sold Prices
Calculator
Map
Property Trends & Insights
  • Blog Home
  • For Buyers
  • For Sellers
  • Real Estate News
  • Mortgage News in Canada
  • Free Guides (PDF)
  • Real Estate Infographics
  • Real Estate News
Zoocasa
Home Mortgage News

How to Calculate Your Mortgage Prepayment Penalty

Zoocasa by Zoocasa
March 12, 2013
in Mortgage News
3 min read
Share
Tweet
Share
0 Shares

By RateHub.ca

Are you thinking of refinancing your existing mortgage to consolidate other debts or take advantage of a lower interest rate? Before rushing to the bank, you should consider two things: the type of mortgage you have and the penalty fee you could potentially have to pay to do so. If you have an open mortgage, you can pay off your mortgage at any time without penalty. However, if you have a closed mortgage, paying off your mortgage beyond your prepayment privileges can result in a hefty penalty.

Let’s take a look at the two different prepayment penalties – three months’ interest and the interest rate differential (IRD) – and see how they are calculated and when you would have to pay them.

Three Months’ Interest

Three months’ interest is exactly that – making it much more straightforward than the IRD calculation – and it only varies slightly from lender-to-lender. Three months’ interest is calculated as three months of simple interest at your current mortgage rate on your current mortgage balance.

For example, let’s say you still owe $250,000 on your mortgage and your current interest rate is 3.75 per cent. If you were to refinance, you would calculate your penalty by multiplying 3.75 per cent by $250,000, dividing the total by 12 months and multiplying that by 3 months.

Some lenders, on the other hand, use their Prime rate instead of your current mortgage rate. CIBC is one bank that uses its own Prime rate, so the example numbers from above end up looking like this:

If you break a variable rate mortgage, the penalty is always three months’ mortgage. But if you break a fixed rate mortgage, you will pay the greater of three months’ interest or the IRD.

Interest Rate Differential (IRD)

The interest rate differential (IRD) is a little bit trickier to calculate, because lenders use different rates to determine how much your penalty will be. The basic idea is that your lender wants to find the amount of interest they will lose by letting you pay off your mortgage early. To determine the IRD, your lender will first look at the difference between two rates – usually the posted rate from the day you got your mortgage and the posted rate that you would get on a similar term today.

Because these numbers aren’t always easy to come up with on your own, RateHub.ca has built a penalty calculator that finds the numbers for you and estimates what your penalty will be. Let’s use the same numbers as before and assume you’re breaking a fixed rate mortgage with CIBC. If the balance of your mortgage was $250,000 and you still had 23 months remaining in your term, your IRD for CIBC would look like this:

In this example, you’d pay the IRD penalty of $9,823 because it is greater than three months’ interest. Again, remember the IRD is only applicable for homeowners with fixed rate mortgages.

No matter how much your prepayment penalty is, it’s important to calculate whether or not refinancing is something that will save you money in the long run. To see how much a refinance could save you, run your own numbers through a refinance calculator.

—

About the contributor:

RateHub.ca is an independent, impartial website that compares mortgage rates. RateHub also focuses on delivering clear, easy-to-understand mortgage education and robust mortgage calculators.
Previous Post

Dollar for Dollar: Canadians buying up American Residential Real Estate

Next Post

Top 10 Tips to Creating the Dream Home that Buyers Want

Zoocasa

Zoocasa

Zoocasa.com is a full-service brokerage that offers advanced online search tools to empower Canadians with the data and expertise they need to make more successful real estate decisions. View real estate listings on zoocasa.com or download our free iOS app.

Related Posts

Reality Check: Interest Rates Are Rising, Securing A Mortgage Now is Best for Buyers
Affordability

Reality Check: Interest Rates Are Rising, Securing A Mortgage Now is Best for Buyers

April 22, 2022
No Change to Bank of Canada Rate in October, Even as Inflation Burns Hot
Bank of Canada

No Change to Bank of Canada Rate in October, Even as Inflation Burns Hot

October 27, 2021
Bank of Canada Announcement: Ultra Low Rates to Stay as Economy Recovers from COVID-19 Impact
Bank of Canada

Bank of Canada Announcement: Ultra Low Rates to Stay as Economy Recovers from COVID-19 Impact

April 21, 2021

Blog Search

No Result
View All Result

Recent Articles

Five Fixes to Maximize Property Value Before Selling Your Home

Five Fixes to Maximize Property Value Before Selling Your Home

May 20, 2022
The Most Viewed Homes in April 2022

The Most Viewed Homes in April 2022

May 18, 2022
Entering a Balanced Market Spells Relief for Many Buyers: CREA

Entering a Balanced Market Spells Relief for Many Buyers: CREA

May 16, 2022
New Owner of the Cheapest Home in GTA has Big Plans for Her “250 Square Feet of Paradise”

New Owner of the Cheapest Home in GTA has Big Plans for Her “250 Square Feet of Paradise”

May 13, 2022
first-time home buyer programs and rebates

Featured Listings (Updated Weekly)

Updated: 7 Houses Under $900,000 For Sale in Mississauga

Updated: 7 Houses Under $900,000 For Sale in Mississauga

May 11, 2022
Hidden Gems in London, ON Currently Listed for Sale Under $540,000

Hidden Gems in London, ON Currently Listed for Sale Under $540,000

May 6, 2022
Updated: Cheapest Toronto Homes Currently Listed for Sale Under $1,000,000

Updated: Cheapest Toronto Homes Currently Listed for Sale Under $1,000,000

May 3, 2022
The Cheapest Toronto Condos Currently Listed for Sale Under $600,000

The Cheapest Toronto Condos Currently Listed for Sale Under $600,000

May 2, 2022

Social Media

Newsletter Sign-up

Join a community of 130,000+ subscribers. Don't miss important real estate news, market data, and buying and selling tips.

About Zoocasa

Zoocasa.com is a full-service brokerage that offers advanced online search tools to empower Canadians with the data and expertise they need to make more successful real estate decisions.

Newsletter Sign-up

Join 130,000+ weekly subscribers. Don’t miss important real estate news, market data, and buying and selling tips: sign-up here.

Social Media

Zoocasa Tools

MLS Listings Canada
Search Sold Listings
iOS App
Android App
Find an Agent
Contact Us

  • Homes & Real Estate Properties
  • Terms of Use
  • Privacy Policy
  • Contact Us

© 2015 - 2022 Zoocasa Realty Inc., Brokerage

  • Blog Home
  • For Buyers
  • For Sellers
  • Real Estate News
  • Mortgage News in Canada
  • Free Guides (PDF)
  • Real Estate Infographics
  • Real Estate News
No Result
View All Result

© 2015 - 2022 Zoocasa Realty Inc., Brokerage