Mortgage FAQ's 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. What is the difference between a fixed rate mortgage versus a 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. What is better for me, an open or closed 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. How do I know whether a longer mortgage term, or shorter term 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. How can I pay off my mortgage faster without being charged a 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. Here are some examples: Making a lump sum prepayment | |||
Payment frequency | Monthly | Accelerated Weekly | Accelerated Bi-weekly |
Principal & Interest payment | $789.03 | $197.26 | $394.52 |
Interest paid over term | $21,526.20 | $21,043.72 | $21,065.24 |
Principal paid | $75,815.60 | $80,243.88 | $80,222.36 |
Closing mortgage balance | $74,184.40 | $69,756.12 | $69,777.64 |
Increasing a regular mortgage payment amount | |||
Payment frequency | Monthly | Accelerated Weekly | Accelerated Bi-weekly |
Principal & Interest payment | $789.03 | $197.26 | $394.52 |
Additional Principal payment | $50.00 | $11.54 | $23.08 |
Interest paid over term | $27,610.51 | $27,123.61 | $27,146.52 |
Principal paid | $22,731.29 | $27,164.39 | $27,141.48 |
Closing mortgage balance | $127,268.71 | $122,835.61 | $122,858.52 |
Changing a regular mortgage payment from Monthly to Weekly, or Bi-weekly | |||
Payment frequency | Monthly | Accelerated Weekly | Accelerated Bi-weekly |
Principal & Interest payment | $789.03 | $197.26 | $394.52 |
Interest paid over term | $27,922.70 | $27,440.06 | $27,461.74 |
Principal paid | $19,419.10 | $23,847.54 | $23,825.86 |
Closing mortgage balance | $130,580.90 | $126,152.46 | $126,174.14 |
Can I avoid being charged a prepayment penalty if I decide to end my current agreement prior the maturity? 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. What type of prepayment penalty could I be charged should I decide to pay off my mortgage early (prior to maturity)? 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). How is the 3 month interest penalty calculated? 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 | 3.89% = .0389 |
Step 3 | (C) | A x B = C | $4,668.00 |
Step 4 | (D) | C ÷ 4 = D, D is the estimated | $4668.00/4= $1167.00 |
Step 5 | (E) | D + Reinvestment Fee (if applicable) = E, E is your estimated Early Payout Penalty | $1167.00 + 400.00 = $1567.00 |
How does my lender calculate my IRD penalty? 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 (1-800-265-2624). 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 (see our website or call our Customer Service Centre for rates) | 3.19% |
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% |
Step 4 | (D) | Amount you are paying out | $120,000.00 |
Step 5 | (E) | Number of months remaining | 45 months |
Step 6 | (F) | (C x D x E) ÷ 12 = F, F is the estimated | (.0070 X $120,000 X 45)/12 = $3150.00 |
Step 7 | (G) | F + Reinvestment Fee (if applicable) = G, | $3150.00 + 300.00 = $3450.00 |