Pre-Payment Penalties and Privileges

How do Pre-Payments affect your mortgage?

Pre-payment penalties

For the majority of mortgages, borrows are charged a penalty if they wish to pay off all or part of the mortgage before the end of the term. The normal prepayment penalty is typically the greater of three months' interest or the Interest Rate Differential (IRD).

An IRD is the difference between your original mortgage interest rate and the current interest rate applied to the amount for your remaining term of mortgage.

Calculate your IRD penalty:

  • Step 1: Review your most recent mortgage statement. Note the interest rate and the time left on the mortgage and the mortgage balance. For example, if you are in a 5-year mortgage that you have been making payments on for 2 years, you will still have 3 years or 36 payments left on the mortgage.
  • Step 2: Take your current rate and add 1.5%. This is roughly the posted rate at the time the mortgage was issued. Then find the current posted rate on a similar mortgage offered by your current lender. Make sure to use the posted rate that most closely matches your remaining term (3 years for our example above). If the rate is higher than your current mortgage rate (including the 1.5%) no need to go further, as the 3-month interest penalty will apply. If the posted rate is lower, continue on.
  • Step 3: Take your current rate (with 1.5% added) and subtract your current bank's posted rate. This number will provide the interest rate differential (IRD).
  • Step 4: Multiply the IRD by the number of years left on the term of your mortgage (in our example it would be 3 years). Then multiply that number by your remaining principal amount on your mortgage. The result will be your IRD penalty.

Please note that most lenders perform the IRD calculations this way, but not all. Contact your lender directly to determine your exact IRD penalty.

Pre-payment privileges

Most mortgage products either offer or allow pre-payment privileges, including annual lump sum contributions and/or an increase in the mortgage payments (up to a certain percent, 5% - 25%, depending on the lender).