Mortgage Basics: Types of Mortgages and Prepaying Mortgages

Mortgage Types
Description
Fixed Rate Mortgage
In a fixed rate mortgage, interest rates and your payment will remain fixed for the entire term of the mortgage that you select. A fixed rate mortgage offers you stability in case market interest rates change over the term of your mortgage.

Fixed interest rates are usually higher than variable interest rates.
Variable Rate Mortgage With a variable rate mortgage, your interest rate will fluctuate with changes to the Coast Capital Savings prime rate. Your payments will stay the same for the term, but if the prime rate goes up, more of the payment will go towards interest and less towards paying down the principal.
Closed Mortgage
A closed mortgage cannot be prepaid, renegotiated or refinanced before its maturity date, except according to its terms and conditions. An early payout will typically result in you paying a prepayment penalty.

Closed mortgages generally offer lower rates than open mortgages with a comparable term length.
Open Mortgage
An open mortgage can be prepaid at any time without a prepayment penalty, allowing you more flexibility in making extra payments or paying off your mortgage in full. While there may be no prepayment penalty, other charges may be applicable if the mortgage is paid out in full.

Open mortgages generally offer higher rates than closed mortgages with comparable term length.
Long-Term Mortgages
A long-term mortgage will allow you to lock into an interest rate for a longer period of time. However, you may not be able to make any changes to your mortgage agreement for the term without incurring a prepayment penalty.

Terms longer than 5 years will only be subject to 90 days’ interest prepayment penalty after the first 5 years have lapsed.

Coast Capital Savings offers 3 to 10-year terms for long-term closed mortgages.
Short-Term Mortgages
A short-term mortgage locks in an interest rate for a shorter duration, which allows you to more quickly renegotiate or change products to suit your needs.

Coast Capital Savings offers 1-year open term mortgages, and 2-year closed term mortgages.

Prepayment Penalties

A prepayment penalty may apply to your closed mortgage if you make a prepayment greater than the annual prepayment privilege allowed in your agreement, prepay your mortgage in full, renew early, refinance, or transfer your mortgage to another financial institution.

Options to pay off your closed mortgage faster without a prepayment penalty

Use your prepayment privileges
You may make a prepayment on your mortgage principal once each year with no penalty. For most mortgages, you can prepay up to 20% of the original mortgage principal without charge once each calendar year; If you have a “You’re the Boss Mortgage”, you can prepay up to 30% of your original mortgage principal each loan year, in one or multiple payments. Additionally, you may not use your prepayment privilege within 30 days of paying off your mortgage in full.

For mortgages before November 1, 20181 that are not “You’re the Boss Mortgages”, you may only use your prepayment privilege on your mortgage anniversary date.

If you make prepayments in amounts or on dates not permitted by your prepayment privileges, you will be subject to a prepayment penalty as set out in the terms of your agreement.

Contact us if you have questions about your mortgage or prepayment privileges.
1 Any mortgage for which Coast Capital Savings prepared an agreement before November 1, 2018.
“Double-Up” your payments You can “Double-Up” your regular mortgage payment: on each payment date, you can pay up to twice the amount of the regular mortgage payment. The additional payment is applied to your mortgage principal.
Accelerate your payment frequency More frequent payments—weekly or biweekly—can help you pay off your mortgage faster. Accelerated payments allow you to make the equivalent of one extra monthly payment each year, which can reduce the overall interest charges over the life of your mortgage.
 

How to Avoid Prepayment Penalties 

Mortgage Portability Porting your mortgage allows you to transfer your existing mortgage to a new property and remain with Coast Capital Savings. As long as you meet certain requirements, you can keep your existing interest rate and term without paying a prepayment penalty.
Open Mortgage An open term mortgage will allow you to payout or prepay your mortgage at any time without a prepayment penalty.


How to Calculate your Prepayment Penalty

If you have a variable rate closed mortgage or fixed rate closed mortgage, your prepayment penalty will be calculated using one of the following two methods:

Fixed Rate
Variable Rate
Calculated as the higher of*:

The 90 days’ interest method calculated using the following steps:

Step 1:
(A) Amount of payment
(B) Mortgage interest rate written as a decimal
(C) A x B = C

Step 2:
(D) C ÷ 365 x 90 = D, estimated 90 days’ interest

OR

The Interest Rate Differential (IRD) method.
This method calculates the value of the interest payments that will no longer be paid to Coast Capital Savings as a result of your prepayment. The IRD is the difference between your existing Annual Interest Rate and our current posted rate charged for a residential closed fixed first mortgage loan offered by us with a term nearest in length to your remaining term (a “Replacement Rate”), less any rate discount you may have received.**

Step 1:
(A) annual interest rate on your mortgage
(B) the Replacement Rate, less any rate discount you may have received**
(C) A - B = C, which is the difference between your existing interest rate and the current rate
(D) amount of payment

Step 2:
(E) number of months left until your mortgage maturity date
(F) (C x D x E) ÷ 12 = F, estimated interest rate differential amount

If you’re wondering how we determine the value of (B) in the IRD calculation above, you can look up the current posted rates on our website at: coastcapitalsavings.com and subtract from it the interest rate discount you received on your mortgage.**

Note: This prepayment calculation will provide an estimate: it takes the mortgage balance at the time of prepayment and calculates the interest rate differential based on that mortgage balance, multiplied by the remaining time in your term. This estimate is higher than the actual prepayment penalty you would be charged, since the actual prepayment penalty will take into consideration scheduled payments between the prepayment date and the end of your term.
Calculated as:

The 90 days’ interest method calculated using the following steps:

Step 1:
(A) Amount of payment
(B) Mortgage interest rate written as a decimal
(C) A x B = C

Step 2:
(D) C ÷ 365 x 90 = D, estimated 90 days’ interest

* If your term is greater than 5 years, and you prepay after the 5th year of your term, the prepayment charge will be calculated using the 90 day interest method.

** If your mortgage agreement was prepared before [Insert Continuance Date], the replacement rate we use in the IRD calculation is determined per the terms of your agreement. Please contact your local branch or our Contact Centre at 1.888.517.7000 to confirm your replacement rate.

Note: If there are less than 90 days remaining in your term, your prepayment penalty charge would be calculated as follows:

Step 1:

[Prepayment Amount] (A) Amount of payment
[Rate] (B) Mortgage interest rate written as a decimal
[Calculation] (C) A x B = C


Step 2:

[Calculation] (D) [C ÷ 365 x [number of days remaining in term if less than
90 days] = D, estimated [number of days remaining in term
if less than 90 days] days’ interest]

Example Prepayment Penalty

Here is an example to illustrate the cost of paying off the mortgage in full before the maturity date:

Mortgage Type Fixed Rate Closed Mortgage
Principal Outstanding $100,000
Term Remaining 36 months
Mortgage Interest Rate 5%
Replacement Rate 4.5%
Interest Rate Discount 0.5%


Since the mortgage is a Fixed Rate Closed Mortgage, the calculation will be based on the higher of the 90 days’ interest method and IRD method. 

The 90 days’ interest method:

Step 1:
(A) amount of payment
$100,000
(B) mortgage interest rate written as a decimal 0.05
(C) A x B = C  $5,000
Step 2:
(D) C ÷ 365 x 90 = D (5,000 ÷ 365 x 90)
 $1,233, estimated 90 days’ interest

OR

Interest Rate Differential Amount:

Step 1:
(A) annual interest rate on the existing mortgage
 0.05
(B) Current annual interest rate for a new mortgage with a term that is closest to the remaining term in the existing mortgage (less 0.5% discount received on the example mortgage  0.04
(C) A - B = C, which is the difference between the existing interest rate and the current rate  0.01
(D) amount being paid off in example   $100,000
Step 2:
(E) number of months left until the mortgage matures
 36 months
(F) (C x D x E) ÷ 12 = F     (0.01 * $100,000 * 36) ÷ 12  $3,000, estimated interest rate differential prepayment penalty


In this example, the estimated prepayment penalty to pay off the mortgage would be $3,000, the higher of the two methods.

Want to know more?

If you use the calculations above, you will arrive at estimates which are likely to be higher than the actual prepayment penalty you may incur. If you would like the exact amount of the prepayment penalty that will apply to you, or if you have any other questions about your mortgages, please contact us toll free at 1.888.517.7000.

You can also find more information about mortgages and prepayment penalties by visiting the website of the Financial Consumer Agency of Canada at: https://www.canada.ca/en/financial-consumer-agency/services/mortgages/choose-mortgage.html