Mortgage Prepayment Guide

Mortgage Prepayment and Prepayment Indemnities Guide

The ABC's of mortgage financing

Amortization: The number of months required to repay the loan and pay the interests in full.

Closed term loan: Loan which may not be prepaid before the term's maturity, unless an indemnity is paid to the Bank.

Fixed rate: Interest rate which does not fluctuate for the entire duration of the term.

Indemnity: Amount payable to compensate the Bank for any loss of income incurred by the Bank due to the prepayment of a loan.

Open term loan: Loan which may be prepaid before the term's maturity, without indemnity.

Posted rate: Interest rate used to calculate the indemnity. This rate corresponds to the fixed rate published by the National Bank at the beginning of the term for a residential mortgage loan with the same characteristics as your mortgage loan. This rate may be different than the rate applicable to your loan.

Prepayment: Total or partial payment of the loan before the term's maturity.

Rate differential: Difference between the posted rate and the standard rate, calculated on the remaining term.

Renewal: Agreement determining the terms and conditions of a new term (duration of new term, interest rate, payment frequency, etc.) upon the term's maturity.

Standard rate: Interest rate published by the National Bank to determine the interest rates applicable to residential mortgage loans.

Term: Duration of the loan during which certain terms and conditions apply (interest rate, payment frequency, etc.).

Variable rate: Interest rate which fluctuates for the duration of the term according to the standard rate variations.

Descriptive Table of Different Types of Loans and their Characteristics


Type of loan
This product may suit you if: Main characteristics Applicable indemnity upon prepayment

Fixed interest rate mortgage loan

You want protection from interest rate fluctuations for the entire duration of your term and benefit from the stability of mortgage payment amounts.

Fixed interest rate and fixed payments for the entire duration of the term.

The higher of the following 2 amounts:

  1. 3 months of interest; or
  2. the sum of the following 2 amounts: 1 month of interest with a maximum of $500 and the rate differential.

Variable interest rate mortgage loan

Your can tolerate a fluctuation in your mortgage payment amounts. You wish to save on interest when interest rates are low.

Interest rate which fluctuates for the duration of the term according to the standard rate fluctuations.
Fixed amount payments or variable amount payments (will vary according to rate fluctuations).
Possibility of converting into a fixed rate mortgage loan with a term equal or greater to the remaining period of the current term, without indemnity.

3 months of interest.

Closed term mortgage loan

You are not planning on selling your property or needing to refinance within the next 6 months.

Interest rate lower than rates applicable to open term mortgage loans of equivalent duration.

Refer to indemnity applicable to fixed rate loans and variable rate loans.

Open term mortgage loan

You are planning on selling your property within the next 6 months, or your projects are uncertain in the short term.

No indemnity applicable upon prepayment.
Interest rate higher than the rate applicable to closed term loans of equivalent duration.

No indemnity applicable.

Short term mortgage loan

Your projects are uncertain in the medium term. For example, you plan on selling your property within the next 12 months to 48 months.

Terms of 3 months to 48 months.

Refer to indemnity applicable to fixed rate loans and variable rate loans.
For a fixed interest rate loan with an applicable indemnity based on the rate differential, the greater the remaining term is upon prepayment, the greater the indemnity will be. In contrast, the shorter the remaining term, the smaller the indemnity will be.

Long term mortgage loan

No move or change in your personal finances is planned for the following 60 months or more.

Terms of 60 months to 120 months.

Certain decisions may cause you to pay indemnities related to the prepayment of your mortgage loan. For example,:

  • refinancing your mortgage loan before the term comes to maturity;
  • renegotiating your mortgage loan terms and conditions before the term comes to maturity;
  • making a principal prepayment greater than 10% of the original loan principal amount before the term comes to maturity;
  • making a total prepayment of your mortgage loan before the term comes to maturity;
  • transferring your mortgage loan to another financial institution before the term comes to maturity.

Your term has not come to maturity and you wish to reimburse your loan loan with a closed term more quickly? Three options are available to you:

  • make a partial prepayment (principal payment);
  • increase your mortgage payments;
  • increase the frequency of your payments.
  1. Principal Payment

    Each calendar year, you may prepay up to 10% of the original loan principal, without indemnity 1 . This prepayment can be made in one or several payments throughout the year.

    When your term has come to maturity, you may repay any amount you wish before the new term begins (renewal of your loan).

  2. Payment Increase

    You have 2 options to prepay an additional amounts without indemnity:

    1. add to your current payment (principal and interest) an amount that does not exceed the amount of this payment;
      • Example: your payment is $650 and is due on the 15th of each month. Therefore, on the 15th of every month, you may pay without indemnity an additional amount of $650 or less.
      increase the amount of the payment by an amount that does not exceed the applicable payment at the beginning of the term. This privilege may be exercised once each calendar year and binds you until the term maturity date.

    2. Example: the term of your loan is five years and the regular payment at the start of the term is $500. The maximum increase of the payment is $500 each year. You increase the regular payment to $1,000 the second year, to $1,200 the third year and to $1,700 the fourth year. You do not increase the payment on the fifth year: it will remain at $1,700. In this example, the unused amount of $300 on the third year may not have been added to the maximum increase of $500 of the fourth or fifth year.

     

  3. Payment Frequency Increase

    You may increase the frequency of your payments 2 . This will allow you to pay down more principal, thereby decreasing the total reimbursement period of your mortgage loan.

    If you chose a payment frequency of every two weeks or weekly, you benefit from accelerated payments. These accelerated payments enable you to pay half of a monthly payment every two weeks (frequency of every two weeks) or the quarter of a monthly payment every week (weekly frequency). Since there are 52 weeks in a year, you will make 26 payments per year (52 weeks ÷ 2) if you pay every two weeks or 52 payments per year if you pay weekly. This means that you make an extra payment equivalent to one monthly payment per year. Therefore, you will repay your loan more quickly.

You must sell your property, want to refinance or renegotiate your loan before the end of the term? Three options are available to you :

  1. Roll-Over Mortgage

    A roll-over mortgage involves transferring the terms and conditions of your existing mortgage loan (balance, interest rate and remaining term) to a new mortgage loan taken out at National Bank for the purchase of another property. This transaction enables you to recover all or part of the indemnity amount paid when the new mortgage loan is disbursed.

    If the amount of the new mortgage is less than the balance of the existing loan or the rate and remaining term are less than those of the existing mortgage loan, an indemnity may be charged

  2. Buyer Referral

    In certain cases, you may not be required to pay an indemnity if the Bank grants the buyer of your property a mortgage loan with an amount, rate and remaining term equal to or greater than those of your existing mortgage loan.

  3. Double Mortgage
  4. Buying a bigger house? There is one more option available to you.

    If you or your buyer obtain a closed term mortgage loan for an amount equivalent to at least twice the balance of your existing loan, all or part of the indemnity triggered by the prepayment of your closed term loan may be reimbursed.

For your information, the following will allow you to estimate the applicable indemnity upon prepayment.

Simplified formula for an indemnity corresponding to 3 months of interest:

The indemnity corresponds to 3 months of interest and is calculated on the prepayment amount at the posted rate for a fixed rate loan or at the standard rate for a variable rate loan.

Quick calculation formula:

Loan balance X Rate / 12 months X 3 months

Example of indemnity calculation upon payment in full of a fixed rate loan:

Loan balance: $150,000
Posted rate: 6.50 %

Calculation of indemnity
$150,000 X 0.065 / 12 months X 3 months = $2,437.50

Simplified formula for an indemnity corresponding to the rate differential

The indemnity corresponds to the rate differential, to which is added one month of interest. The indemnity is calculated on the amount of the prepayment:

Rate differential + 1 month of interest at the posted rate (maximum of $500).

The rate differential represents the difference between the posted rate and the standard rate, calculated on the remaining term.

If no standard rate exists for the corresponding remaining term (ex.: 53 months), a standard rate is determined for calculation purposes by using a rate between the rates published for the two terms closest to the remaining period (ex.: 48 months and 60 months).

Quick calculation formula

Standard rate

Rate of the shortest term + [(Rate of the longest term - Rate of the shortest term) X (Remaining term of the loan - Shortest term) / (Longest term - Shortest term)] = Standard rate

Indemnity
[Loan balance X (Posted rate - Standard rate)] / 12 months X Remaining term + 1 month of interest (max. $500)

Example of payment in full
Loan balance: $150,000
Posted rate: 6.50 %
Remaining term: 53 months
Standard rate / term of 48 months: 5.75 %
Standard rate / term of 60 months: 5.79 %

Calculation of standard rate

5.75 % + [(5.79 % - 5.75 %) X (53 months - 48 months) / (60 months - 48 months)] = 5.77 %

Calculation of indemnity

[$150,000 X

 (0.065 - 0.0577)]

/ 12 months X 53 months + $500) = $5,336.25 $

   

Rate differential = Posted rate – Standard rate

For more information

If you wish to speak with one of our representatives specializing in prepayment of mortgage loans, you can contact your branch or our Telnat call center toll free at 1-888-835-6281.

For more information, you can also visit the Financial Consumer Agency of Canada website at www.acfc-fcac.gc.ca.

   

1 You do not benefit from this privilege when you repay the balance in full or when the amount of the prepayment is more than 10% of the initial principal amount.
2 Starting at the 2nd change request, fees may be payable.
3 All strategies set out in this text are conditional on the approval of new mortgage financing within 90 days following the prepayment of the original mortgage loan. All strategies apply only to new mortgage financing. All other types of financing are excluded (All-In-One, personal Line of Credit, personal loan, etc). Other conditions may apply.