Fixed vs. Variable Rate Mortgages

Fixed Interest Rate

  • Interest rates in a fixed rate mortgage are guaranteed and will remain the same for the entire duration of the term
  • Fixed rate mortgages make it easy to know how much your payments will be, and how much of your mortgage will be paid off at the end of your term

Variable Interest Rate

Equity Financial Trust Company does not offer a variable rate mortgage product

Interest rates in a variable rate mortgage fluctuate when the prime rate changes

If your interest rate decreases, your payment amount remains the same, but more of your mortgage payment is applied to the principal balance owing

If your interest rate rises, your payment amount remains the same, but more of your monthly payment is applied to the interest owing

Open vs. Closed Term Mortgage

Open Term Mortgage

  • Allows for the prepayment of the loan, or a portion of the loan, at any given time throughout the term without penalty

Closed Term Mortgage

  • Full prepayment is only permitted upon the closing of a bona fide arms-length sale in the open market and payment of the prepayment charge being the greater of:
    1. Three (3) months’ interest at the interest rate of the mortgage calculated on the mortgage amount being prepaid; or
    2. The Interest Rate Differential (“IRD”) which is equivalent to the difference between your existing interest rate and the current posted interest rate or reinvestment rate for a term that is the same or the closest to the remaining term of your mortgage, multiplied by the amount being prepaid and multiplied by the time that is remaining on the term
  • Allows for the prepayment, once in each year, an amount not greater than twenty percent (20%) of the original principal amount of the mortgage, without prepayment charges. This prepayment privilege is not cumulative

Long vs. Short Term Mortgage

Long Term Mortgage

  • A Long Term mortgage is usually 3 or more years.

Short Term Mortgage

  • A Short Term mortgage is usually 1 or 2 years.

Prepayment Charges

Prepayment Charge Calculations

  • Payment timing, payment amount and interest rate changes can have a big impact on your prepayment charge calculations. Use the prepayment calculator at equityfinancialtrust.com/prepayment calculator to see how changes can impact your prepayment charges. Chris and Anne have thirty six (36) months remaining on the term of their mortgage which was approved prior to 2016. They have a remaining mortgage balance of $200,000 and are paying an interest rate of 5%. They have recently sold their home and would like to pay off their outstanding mortgage balance. The current posted interest rate for a term that is the same or the closest to the remaining term of their mortgage is 4%. In this example, Chris and Anne estimate that it would cost them $6,000 to pay off their mortgage before the maturity date, since the IRD amount is higher than the three months’ interest costs.

    *In addition to the penalty, a fee is charged for the administration of the discharge.

Reducing Your Prepayment Charges

By reducing the principal balance of your mortgage, you will reduce the balance on which the IRD or 3 months’ interest is calculated. There are a number of ways in which to reduce theprepayment charges that may be applicable. Some examples of how you can achieve this are:

  • Make prepayments within your privileged amount
  • Change your payment frequency to a more frequent payment schedule and make up to an extra months’ payment every year
  • Choose an open mortgage
  • Coordinate the full prepayment of your mortgage with your term maturity date

1. Estimate The Cost Of Three Months’ Interest

Step 1
Amount Chris and Anne want to pay off$200,000 (A)
Mortgage interest rate written as a decimal.050 (B)
A x B = C ($200,000[A] x .05[B] = $10,000 [C])$10,000(C)
Step 2
C divided by 4 = D ($10,000[C] divided by 4 = $2,500[D])$2,500 (D)

2. Estimate The Cost Of The Interest Rate Differentials

Step 1
Existing interest rate (expressed as a percentage)5% (A)
Current posted interest or reinvestment rate for a term that is the same or the closest to the remaining term in their mortgage4% (B)
A – B = C, the difference between their existing interest rate and the current posted interest or reinvestment rate, written as a decimal0.010 (C)
Amount Chris and Anne want to pay off$200,000 (D)
Step 2
Number of months remaining on the term of their mortgage36 months (E)
C x D x E divided by 12 = F (.010[C] x200,000 [D] x 36 [E] divided by 12 = $6,000[F])$6,000 (F)

Factors Affecting Prepayment Charges

The prepayment charges you will have to pay can change over the term of your mortgage.

Decrease in prepayment charges can occur:

  • As the remaining principal balance decreases
  • As current posted interest or reinvestment rates increase (only where IRD is applicable)
  • As the remaining term decreases (only where IRD is applicable)

Increase in prepayment charges can occur:

  • As current posted interest or reinvestment rates decrease (only where IRD is applicable)
  • As the remaining principal balance increases
  • As the remaining term increases (only where IRD is applicable)

Need More Information?

  • Call 1.855.272.0051 for further questions or if you require live assistance from a mortgage servicing specialist
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