Another important decision is whether to go with an open or closed to prepayment term.

Open Mortgages

Open mortgages are typically best suited to customers who want the flexibility of being able to prepay any amount of their outstanding balance at any time without worrying about prepayment charges at anytime. However, open mortgages may have a higher interest rate because of the added prepayment flexibility.

Closed Mortgages

Closed mortgages can give you the option to make a maximum lump sum payment each year. Lender may have different policies on their annual prepayment privileges, make sure you ask your broker when completing your application. If you want to prepay more, a prepayment charge may apply. A closed mortgage typically has a lower rate than an open mortgage for the same term.

Penalties

If you decide to pay out or "break" your mortgage early, you may be subject to a prepayment charge. A prepayment charge for a closed to prepayment mortgage with a variable interest rate is calculated as three months of interest. We calculate the interest you would owe over 90 days on the amount being prepaid, using your annual interest rate. The result is the three months of interest amount that you will have to pay.

The prepayment charge for a closed mortgage with a fixed interest rate is the higher of two amounts:

1. Three months interest, OR

2. The Interest Rate Differential, aka the IRD, which is the difference between the principal amount you owe at the time of the prepayment and the principal amount you would owe using a similar mortgage rate. The similar mortgage rate is the posted interest rate for a similar mortgage, minus any rate discount you received.

Got questions? Reach out to Angie Li at TMG – she’s here to help!