With a fixed rate mortgage, you pay the same interest rate for the entire length of your mortgage term. Your regular mortgage payment is also fixed. That means:
It's easier to budget for the future since you know exactly what your interest payments will be and how much of the principal balance will be paid off during the term
You don't have to worry about your interest payments increasing because of rising interest rates. You will know exactly how much interest you will be paying throughout the term of your mortgage
With a variable rate mortgage, your interest rate fluctuates with changes to CIBC Prime Rate. As a result, if CIBC Prime Rate drops, so will the amount of interest you pay.
How does this impact the prepayment charge?
If you have a fixed rate closed mortgage and would like to break the term or prepay part or all of your mortgage, you may incur a prepayment charge of the greater of 3 months' interest or the interest rate differential
If you have a variable rate closed mortgage and would like to break the term or prepay part or all of your mortgage, you may incur a prepayment charge equivalent to 3 months' interest
An open term mortgage gives you the flexibility to pay off as much of your mortgage as you want, when you want. If you have an open term and would like to break the term or prepay part or all of your mortgage principal, you may do so without a prepayment charge. For instance, if you have the funds available, you could make additional payments on your mortgage and eventually pay off your mortgage more quickly, which could save you thousands of dollars in interest. With this flexibility, the interest rate on an open term mortgage is generally higher than a closed term mortgage.
With a closed term mortgage, the interest rate tends to be lower, but stricter conditions apply - particularly with respect to paying off your principal early. If you have a closed term and would like to break the term or prepay all or part of your mortgage principal, beyond your mortgage's prepayment privileges, you will incur a prepayment charge We offer mortgages with annual prepayment privileges as high as 20% of the original principal amount. We also offer mortgages that permit you to increase your payment once each mortgage year, by up to 25% of the payment amount you selected when you entered or last renewed your mortgage. Prepayment privilege is not available for all mortgages; ask us for details. Any prepayments above your prepayment privilege will result in a prepayment charge.
A mortgage term less than 3 years generally offers a lower interest rate than that of a longer term. When the current rates are high and you think rates may drop, choosing a short term mortgage allows you to lock in for a shorter term.
A mortgage term of 3 years or greater generally offers a higher interest rate than that of a shorter term. When the current rates are reasonably low, choosing a long term mortgage secures the interest rate for a longer period of time and makes budgeting easier.
How does this impact the prepayment charge for a fixed rate closed mortgage?
If you are prepaying a fixed rate closed mortgage before the maturity date, you may pay a prepayment charge. If the prepayment charge is based on the Interest Rate Differential, then the length of the remaining term of your mortgage will impact the prepayment charge. For the purpose of the Interest Rate Differential calculation, the remaining term is calculated from the date of your last payment to the maturity date of your mortgage. When the remaining term changes, the prepayment charge may change.
For example, if you have 2 years remaining on your mortgage at the time you prepay, then the charges may be higher than if you have 6 months remaining when you prepay.
A mortgage is a big commitment. Most mortgages are paid over 25 years, though there are ways that you can 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 any prepayment charges.ⓘ
1. Some types of mortgages allow you to increase your regular payment amount each mortgage year (the 12-month period following the interest adjustment date and each anniversary of the interest adjustment date). This allows you to pay down your principal faster. For example:
For fixed rate closed mortgages with a term of 2 years or greater (other than the Fundamental mortgage), and Auto 12 Plus (Convertible) mortgage, once each mortgage year you can increase your regular payment amount by up to 25% of the payment amount you selected when you entered or last renewed your mortgage.ⓘ
For variable rate closed mortgages, you can increase your regular payment amount to any amount as long as the amortization period is not reduced to less than five years.
2. You can arrange to make your regular payments more frequently, 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 also allow you to pay off your mortgage about 4.5 years sooner.
3. You may have the option of making lump-sum payments (up to your allowable prepayment privilege amount) without incurring any prepayment charges. A lump-sum payment is applied directly to the principal if there is no outstanding interest owing. This saves you money over the course of your mortgage.ⓘ
For example, if you made a $1,000 lump-sum payment every year, you could save almost $28,350 in interest over the entire amortization period of your mortgage. This would allow you to be mortgage-free about 4 years sooner.
4. All mortgages become open at renewal. This means you can pay as much as you want on your mortgage at renewal.
For example, if you chose 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 be mortgage-free about 6 years sooner.
These are examples of options that are available with certain mortgages to avoid prepayment charges:
1. If you're selling and buying a new home, you may have the option to portⓘ your existing mortgage term, interest rate, and outstanding principal balance to a new property
2. 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
If you're thinking about early renewing into a new term, refinancing your mortgage or making a lump-sum payment that exceeds your annual prepayment privilege amount, a prepayment charge may apply.
If you have a fixed rate closed mortgage and would like to prepay your mortgage before the maturity date, your prepayment charge will be the greater of the following:
3 months' interest on the amount you are prepaying
The interest rate differential on the amount you are prepaying.
If you have a variable rate mortgage and would like to prepay your mortgage before the maturity date, you may pay a prepayment charge equal to 3 months' interest on the amount you are prepaying. The interest rate used to calculate the prepayment charge will be the CIBC Prime Rate.
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. For Simplii Financial mortgages, 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 the current posted Simplii Financial interest rate for the mortgage product that we've determined to be similar to your mortgage.
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.
Example of estimating the prepayment charge for a variable rate closed mortgage
Martin has a variable rate mortgage. His original principal amount was $150,000.00. If Martin wanted to pay off the entire principal amount, the prepayment charge would be equal to 3 months' interest on the entire amount he is prepaying, calculated at the CIBC Prime Rate in effect on the date the mortgage payout statement is prepared.
Martin still owes $60,000.00 on his mortgage. If the mortgage payout statement were prepared today, and if the current CIBC Prime Rate is 5.000%, here is how Martin estimates the prepayment charge to pay off the entire mortgage.
Estimate of 3 Months' Interest
The total amount of the prepayment
The CIBC Prime Rate in effect on the date of the mortgage payout statement is prepared (written as a decimal). Thus, 5.000% becomes 0.050.
He multiplies the total amount of the prepayment by the interest rate. This is equal to an estimate of 1 year's interest.
He divides the annual interest cost by 12 to get an estimate of 1 month's interest.
He multiplies 1 month's interest by 3 to get an estimate of 3 months' interest. This is an estimate of the prepayment charge.
When Martin pays off his mortgage, he will need to pay an estimated additional amount of $750.00 to pay for the prepayment charge. This is only an estimate. The mortgage payout statement will show Martin what the prepayment charge will be as long as he pays off the mortgage on the Statement Effective Date.
Martin should call Simplii Financial services to find out the exact amount of his prepayment charge. The amount above is only an estimate.
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 current 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:
3 months' interest at her interest rate of 6.500% plus the discount she received of .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
The amount Maria wishes to pay off is $100,000.00
Maria's current interest rate plus the discount she received equals 7.000%. Written as a decimal, this becomes 0.070.
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.
The estimated annual interest costs divided by 12 equals an estimate of 1 month's interest.
1 month's interest costs multiplied by 3 equals an estimate of 3 months' interest.
So, an estimate of the 3 months' interest amount would be $1,749.99.
Estimate of the Interest Rate Differential Amount
The interests costs over the term of a mortgage with Maria's current principal balance of $100,000.00, 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.
In Maria's case, we determine that the Simplii Financial brand 2-year closed fixed rate mortgage is similar to Maria's mortgage. On the date we prepare the mortgage payout statement, the posted rate for this mortgage is 5.000%.
The interest costs over the term of a Simplii Financial brand 2 year closed fixed rate 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.
The interest costs set out 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 rate differential amount would be $4,036.33.
The Estimated Prepayment Charge
Maria's prepayment charge is the higher of the estimated 3 months' interest amount 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 Simplii Financial services to find out the exact amount of her prepayment charge. The amount above is only an estimate.
Some of the transactions that may result in a prepayment charge are:
Renewing your mortgage before the maturity date
Prepaying more than the amount of your annual prepayment privilege within the mortgage year
Refinancing your mortgage and selecting a new term
Transferring your mortgage to another lender before the maturity date
Paying off your mortgage before the maturity date
These are additional charges that may apply when prepaying a mortgage in full or renegotiating the existing mortgage term before the maturity date:
If the existing mortgage offered a cash back option, repayment of all or a portion of the cash back amount may be required.
A discharge fee and/or assignment fee for document preparation and registration when the mortgage is prepaid in full
If you transfer your mortgage to another lender, an assignment fee will apply
To discuss these and other options, please contact us at 1-888-866-0866
For additional information regarding mortgage options and prepaying your mortgage, visit the Financial Consumer Agency of Canada:
Annual Percentage Rate (APR) means the cost of borrowing for a loan expressed as an interest rate. It includes all interest and non-interest charges associated with the mortgage. If there are no non-interest charges, the annual interest rate and APR will be the same.