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Information on mortgage prepayment


motusbank is committed to offering flexible repayment options, so if you pay down your mortgage faster or pay it off completely, we can help.

Before choosing a motusbank mortgage, learn about our prepayment options to make sure you choose the one that’s right for you.

This page highlights the features and benefits of open, closed, fixed and variable interest rate mortgages, as well key differences between short and long-term mortgages.

What is an open mortgage?

It’s a mortgage that can be prepaid, either partially or in full, during the term of the mortgage without incurring a prepayment charge. This can give you some flexibility until you’re ready to lock into a closed term mortgage. However, it’s important to note that the interest on an open rate mortgage is often higher than on a closed mortgage.


What is a closed mortgage?

It’s a mortgage that can only be prepaid, renegotiated or refinanced before the end of the term by paying a prepayment charge. However, most closed mortgages include some prepayment privileges. For instance, a motusbank closed mortgage lets you to prepay up to 20% of the principal amount each year. Also, a closed mortgage often has a lower interest rate than an open mortgage and offers the benefit of saving on interest costs and paying off your mortgage faster.

What is a fixed interest rate mortgage?

The interest on a fixed rate mortgage does not fluctuate during your mortgage term. Neither does your regular mortgage payment amount. Your regular payment amounts remain constant and you know exactly how much of your principal balance will be paid off during your mortgage term.   


What is a variable interest rate mortgage?

The interest rate on a variable rate mortgage changes based on changes to the motusbank Prime Rate. However, your mortgage amount payment is fixed and doesn’t change.

When the motusbank Prime Rate decreases, the interest you pay will also decrease. A smaller portion of your regular mortgage payment will go toward paying interest, and a larger portion will go toward paying your principal.

When the motusbank Prime Rate Increases, so too will the amount of interest you pay. So a larger portion of your payment will go toward paying interest, while a smaller portion will go toward paying down your principal.

Why choose a short term mortgage?

This type of mortgage usually offers a lower interest rate than a long term mortgage. When current rates are high but you think they may drop, a short term mortgage lets you lock in for a shorter period. It can also be a good option if you plan to sell your home or pay off the mortgage early.


Why choose a long term mortgage?

This type of mortgage usually offers a higher interest rate than a short term mortgage. When current rates are relatively low, choosing a long term mortgage secures the interest rate for a longer period of time. This also makes budgeting easier.

How can a mortgage be paid off faster while avoiding a prepayment charge?

While the average mortgage is paid over 25 years, reducing the number of years you make mortgage payments can result in major savings.

Here are some of the ways you can pay your mortgage down faster without having to pay prepayment charges.

 
Increase your payments
You can increase your payment amount by up to 20% of the original contractual payment each calendar year. Let’s say that your year 1 payment is $100, your year 2 payment can increase to $120 (($100*20%) + $100). Your year 3 payment can then increase to $140 (($100*20%) + $120) and so on.

For example, if you increased your regular mortgage payment by $199 from $999 to $1,198, you could save about $25,000 in interest over the entire amortization period of your mortgage. Additionally, you could eliminate about 6 years’ worth of mortgage payments.

This is assuming that you have a 25 year amortization on a 5 year rate of 3.5% on a $200,000 mortgage with regular monthly payments.

 
Increase your payment frequency
You can increase the frequency of your regular mortgage payments, allowing you to pay down your principal faster and save money in interest charges.

Let’s say that you have the same amortization period and mortgage rate condition of the increase your payments example above. If you made bi-weekly payments of $499 instead of monthly payments of $999, you could save a little over $13,000 in interest over the entire amortization period of your mortgage. It would also allow you to eliminate about 3 years’ worth of mortgage payments.


Make an annual prepayment of up to 20%

You can pay down your mortgage faster by making lump-sum payments which are applied directly to your principal. This saves you money over the life of your mortgage. You cannot exceed your allowable prepayment privilege without incurring additional prepayment charges.

Let’s say you make an annual $1,000 lump-sum payment, you could save a little over $13,000 in interest over the entire amortization of your mortgage, allowing you to pay it off about 3 years sooner.

 
Prepay at renewal
All motusbank mortgages become open at the end of the mortgage term. This means that you can pay down as much of your mortgage as you want before you renew.

For instance, 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 $17,849 in interest over the entire amortization period of your mortgage, allowing you to pay it off about 5 years sooner.



How can you avoid prepayment charges?

Here are some of the ways you can pay your mortgage down faster without having to pay prepayment charges.

Portability

If you're selling and buying a new home, your mortgage may have a portability option that allows you port or transfer your existing mortgage term, outstanding principal balance and maturity date to a new property.


Assumption

If you’re selling your home, the buyer might be able to apply to take over your mortgage with its existing terms and conditions on closing.


Open mortgage

You have the option of paying off your mortgage at any time.

Contact motusbank to learn more about having a potential buyer take over your mortgage, or how to assume somebody else’s mortgage.

When does a prepayment charge apply?

  • When you renew your mortgage before maturity
  • When you prepay more than the annual amount of your annual prepayment privilege
  • When you refinance your mortgage and select a new term
  • When you transfer your mortgage to another lender  
  • When you pay off your mortgage before the maturity date



How are prepayment charges calculated for a variable-rate mortgages?

  • If you have a variable rate closed mortgage, your mortgage is closed to prepayment. There is no option to pay a prepayment charge and make a prepayment over and above the 20% allowable prepayment privilege.



How are prepayment charges calculated for a fixed-rate closed mortgage?

Your prepayment charge is the greater of the two:
  • three months’ interest on the amount you are prepaying (Interest will be calculated at your annual mortgage interest rate)
  • the interest rate differential on the amount you are prepaying



What is interest rate differential (IRD)?

The IRD amount is the difference between the following two amounts:
  • the contractual interest rate of the current term of your mortgage identified in your mortgage documents
  • the current motusbank posted interest rate for a similar mortgage*.  The current interest rate for a similar mortgage is motusbank’s posted interest rate on the current date less any interest rate reduction or discount as documented on your mortgage loan agreement.
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.

*The following table will assist in determining what term would be considered for a similar mortgage:
 
Remaining Term Use the prevailing rate from the Motus Bank website for this term length
0 months - 6 months 6 month
6 months and 1 day - 18 months 1 year
18 months and 1 day to 30 months 2 year
30 months and 1 day to 42 months 3 year
42 months and 1 day to 54 months 4 year
54 months and 1 day to 72 months 5 year
72 months and a day to 96 months 7 year
96 months and a day to 10 years 10 year



The Prepayment Charge may change over time due if:

  • the number of months or days remaining in the term of the mortgage changes with each day, it is possible for the similar term mortgage used for comparison purposes in the IRD calculation to also change
  • the posted rate changes, the IRD calculation will also change because the IRD calculation is based on the difference between the mortgage interest rate and the posted interest rate on the requested payout date less any potential mortgage discount to the posted rate
  • a different payout date is requested, it is possible to have a prepayment charge using the 3 months interest method change to a prepayment charge using the IRD calculation or the reverse due to the factors above
  • the balance reduces the prepayment charge may also change


Examples of prepayment charge calculations for fixed-rate closed mortgages

Use the motusbank prepayment charge calculator to estimate your prepayment charge.



Example of estimating the prepayment charge for a fixed-rate closed mortgage

Karen has a 5-year fixed-rate closed mortgage. She received an interest rate discount of 0.05% when she arranged her mortgage. Her existing annual interest rate on her mortgage is 3.75%.

The principal amount she still owes is $100,000. Karen has two years (or 24 months) left in the term of this mortgage. However, Karen inherited some money and wants to pay her mortgage off completely.

So in this case, the prepayment charge will be the higher of the following two amounts:
 
  • three months’ interest at her interest rate of 3.75%
  • the interest rate differential amount
The following is an estimated prepayment charge for prepaying the full amount of Karen's mortgage. These examples are for demonstration purposes only and do not take into account any prepayments you may have made in the current year


Estimate of 3 months’ interest

 
So, an estimate of 3 months’ interest would be $937.50.


Estimate of the interest rate differential amount

 
So, an estimate of the interest differential amount would be $620.00.

The estimated prepayment charge

Karen's prepayment charge is the higher of the estimated three months' interest costs of $937.50 and the estimated interest rate differential amount of $620.00.

If Karen’s mortgage payout statement was prepared today, an estimate of her prepayment charge would be $937.50.

Karen should call motusbank to find out the exact amount of her prepayment charge. She can ask about the exact amount of her prepayment charge by ordering a payout statement or by calling 1 (833) 696-6887.

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 motusbank prepayment charge calculator to see how these changes affect your prepayment costs.



What additional charges may apply when prepaying a mortgage at motusbank?

There are sometimes additional charges that may apply when prepaying a mortgage in full before the maturity date:

Mortgage discharge fee/assignment fee
  • A discharge fee and/or assignment fee 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

FCAC Mortgage Details