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Prepayment charge calculation examples

The values shown in the table are used throughout all of the examples below:

Annual Interest Rate: 3%
Mortgage Balance: $285,250
Term remaining: 31 months
Our Current Reinvestment Rate (CRR): 2.5%

Closed Variable Rate Mortgage, Lock & Roll Mortgage and Adjustable Rate / Adjustable Payment Mortgage examples

Example 1: Full repayment of the mortgage loan

(Mortgage Balance x Annual Interest Rate) / 4 = prepayment charge

($285,250 x 3%) / 4 = $2,139.38
$285,250 x 3% = $8,557.50 $8,557.50 / 4 = $2,139.38 = prepayment charge

Example 2: Partial prepayment of the mortgage loan

If you wish to prepay a part, but not all, of your mortgage balance, the same formula applies. Simply input the lump sum or prepayment amount you wish to make, in place of the Mortgage Balance in the formula. If the amount of the prepayment is $35,000 then:

(Mortgage Balance x Annual Interest Rate) / 4 = prepayment charge

($35,000 x 3%) / 4 = $262.50
$35,000 x 3% = $1,050 $1,050 / 4 = $262.50 = prepayment charge

Closed Fixed Rate Mortgage examples

Example 1: Full repayment of the mortgage loan

  • Step 1: Determining the three month interest calculation:

    (Mortgage Balance x Annual Interest Rate) / 4 = three month interest prepayment charge

    ($285,250 x 3%) / 4 = $2,139.38
    $285,250 x 3% = $8,557.50 $8,557.50 / 4 = $2,139.38 = three month interest prepayment charge

  • Step 2: Determining the Simplified IRD Calculation:

    Mortgage Balance x (Annual Interest Rate – CRR) / 12 x term remaining = simplified IRD prepayment charge

    $285,250 x (3% - 2.5%) / 12 x 31 = $3,684.48
    (3% - 2.5%) = .5%
    $285,250 x .5% = $1,426.25
    $1,426.25 / 12 = $118.85
    $118.85 x 31 = $3,684.48 = Simplified IRD prepayment charge

  • Step 3: Determining the applicable prepayment charge:

    The three month interest prepayment charge is $2,139.38
    The Simplified IRD prepayment charge is $3,684.48
    The greater of the two prepayment charge amounts will apply so the prepayment charge is $3,684.48

Example 2: Partial prepayment of the mortgage loan

If you wish to prepay a part, but not all, of your mortgage balance, the same formulae apply. Simply input the lump sum or prepayment amount you wish to make, in place of the mortgage balance in the formula. If the amount of the prepayment is $35,000 then:

  • Step 1: Determining the three month interest calculation:

    (Mortgage Balance x Annual Interest Rate) / 4 = three month interest prepayment charge

    ($35,000 x 3%) / 4 = $262.50
    $35,000 x 3% = $1,050 $1,050 / 4 = $262.50 = three month interest prepayment charge

  • Step 2: Determining the IRD calculation:

    The prepayment charge under an IRD calculation may be estimated using the simplified IRD calculation:

    Mortgage Balance x (Annual Interest Rate – CRR) / 12 x term remaining = simplified IRD prepayment charge

    $35,000 x (3% - 2.5%) / 12 x 31 = $452.08
    (3% - 2.5%) = .5%
    $35,000 x .5% = $175.00
    $175 / 12 = $14.583
    $14.58 x 31 = $452.08 = Simplified IRD prepayment charge

  • Step 3: Determining the applicable prepayment charge:

    The three month interest prepayment charge is $262.50
    The Simplified IRD prepayment charge is $452.08
    The greater of the two prepayment charge amounts applies so the prepayment charge is $452.08