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Important Details for Former HSBC Bank Canada* Clients
If you’re considering refinancing, prepaying a large amount, prepaying the full amount, or renegotiating your migrated mortgage, understand how prepayment charges work and ways to avoid these charges.
How Prepayment Charges Are Calculated
The purpose of a prepayment charge is to compensate a lender for the economic costs it incurs when a prepayment amount exceeds the prepayment privileges permitted under the mortgage. Prepayment charges are calculated based on the type of mortgage. See the formulas below or get an estimate with the mortgage prepayment charge calculator. (Opens link in new window)
Mortgage Type
Potential Prepayment Charge
Closed Variable Rate Mortgage
90 days’ interest on the outstanding balance, which can be calculated using this formula:
Outstanding Balance (or amount you want to prepay) x Your Current Interest Rate x 90 days/365 days
Closed Fixed Rate Mortgage
The greater of:
- 90 days’ interest on the amount prepaid at the interest rate, or
- Interest for the remainder of the term on the amount prepaid, calculated using the interest rate differential (IRD)
Below is an example to illustrate the cost of paying off a mortgage before the maturity date.
Paul has a fixed rate mortgage for a 5 year term. His annual interest rate is 5%, which includes a discount of 0.5% he received at the beginning of his current mortgage term. Paul's current outstanding amount is $100,000. He received an inheritance of $100,000 and is considering using it to pay off his mortgage. He has already used all the prepayment options available to him this year. There are 366 days left before his mortgage maturity date. The Bank's current Posted Rate for a fixed rate mortgage with a term that is equal to, or next longer to, Paul's remaining term (i.e. 2 years) is 3.5% per annum.
Paul’s prepayment charge is calculated based on the full amount of the prepayment applied to the principal. The annual interest rate and the Posted Rate are based on the stated (nominal) rate not compounded and a 365 day year.
Based on Paul’s mortgage agreement, we need to calculate 90 day’s interest and the interest differential amount. The greater amount will be the prepayment charge.
1. Calculation of 90 days' Interest
| Step 1 | |
|---|---|
| Prepayment amount | $100,000 |
| Annual interest rate (as a %) | 5% |
| Calculation of 90 days' interest = $100,000 x 5% x 90/365 | $1,232.88 |
2. Calculation of the Interest Differential Amount
Interest differential amount = prepayment amount x (annual interest rate - (Posted Rate - Discount Rate)) x days between prepayment and maturity/365
| Step 1 | |
|---|---|
| A = Posted Rate - Discount Rate = 3.5% - 0.5% | 3% |
| Step 2 | |
| B = Annual interest rate - A = 5% - 3% | 2% |
| Step 3 | |
| Interest differential amount = $100,000 x B x 366 days / 365 = $100,000 x 2% x 366 / 365 |
$2,005.48 |
In this example, it would cost Paul $2,005.48 to pay off his mortgage before the maturity date, since the interest differential amount is greater than the 90 days' interest ($1,232.88).
Note: This example is based on a formula for estimating the cost of prepaying a mortgage before the end of the term. Please contact us for your exact prepayment charge.
HFMI Mortgage
6 months' interest on the outstanding balance, which can be calculated using this formula:
Non-leap year: 6-months' interest = prepayment amount x annual interest rate x 181 days/365
Leap-year: 6-months' interest = prepayment amount x annual interest rate x 182 days/366
The following is an example of an HFMI mortgage with a fixed rate of 5.00% and prepayment of $100,000 is being made.
| Example of a Prepayment Charge Calculation on an HFMI Mortgage | |
|---|---|
| Prepayment amount | $100,000 |
| Annual interest rate | 5% |
| Prepayment charge of 181 days' interest | 181 days/365 days |
| Prepayment charge formula | Prepayment amount x annual interest rate x 181 days/365 |
| Prepayment charge amount | $2,500 |
Note: There is no prepayment charge during the first 90 days and last 90 days of an HFMI mortgage term.
Mortgage Type
Closed Variable Rate Mortgage
Potential Prepayment Charge
90 days’ interest on the outstanding balance, which can be calculated using this formula:
Outstanding Balance (or amount you want to prepay) x Your Current Interest Rate x 90 days/365 days
Mortgage Type
Closed Fixed Rate Mortgage
Potential Prepayment Charge
The greater of:
- 90 days’ interest on the amount prepaid at the interest rate, or
- Interest for the remainder of the term on the amount prepaid, calculated using the interest rate differential (IRD)
Assuming you have a mortgage for a five-year term with a 9% interest rate, taking into account the 0.5% reduction in the interest rate you received at the beginning of the current term. You still owe $100,000; however, you have inherited $100,000 and are thinking of using it to pay off your mortgage. You have used all the prepayment options available to you. There are 36 months left before the mortgage maturity date. The current interest rate for a mortgage with a similar term is 6%.
1. Estimate the cost of three months of interest.
| Step 1 | |
|---|---|
| Amount you want to pay (A) | $100,000 (A) |
| Mortgage interest rate, written as a decimal (B) | 0.09 (B) |
| A x B = C ($100,000 x 0.09 = $9,000) | $9,000 (C) |
| Step 2 | |
| AXB x (90 days/365 days) | $2,250 (D) |
2. Estimate the interest rate differential.
| Step 1 | |
|---|---|
| Mortgage interest rate, expressed as a percentage (A) | 9% (A) |
| Posted annual interest rate of 6% for a new mortgage with a term that is closest to the remaining term in your existing mortgage less the discount of 0.5% you received on your existing mortgage (B) | 5.5% (B) |
| The difference between your existing interest rate and the current rate (A - B = C), written as a decimal .09 - .055 = 0.035 |
0.035(C) |
| Amount you want to pay off (D) | $100,000 (D) |
| Step 2 | |
| Number of days left until the mortgage maturity date (E) | 180 (E) |
| (C x D x E)/365 = F (0.035 x 100,000 x 180) / 365 = $10,500 | $1,726 (F) |
In this example, we estimate it would cost you $1,726 to pay off your mortgage before the maturity date since this amount is higher than the three months of interest cost.
Note: This example is based on a formula for estimating the cost of prepaying a mortgage before the end of the term. RBC Royal Bank uses a more complex calculation that will result in a lower charge than the estimate. You will have to contact us for your exact prepayment charge.
Mortgage Type
HFMI Mortgage
Potential Prepayment Charge
6 months' interest on the outstanding balance, which can be calculated using this formula:
Non-leap year: 6-months' interest = prepayment amount x annual interest rate x 181 days/365
Leap-year: 6-months' interest = prepayment amount x annual interest rate x 182 days/ 366
The following is an example of an HFMI mortgage with a fixed rate of 5.00% and prepayment of $100,000 is being made.
| Example of a Prepayment Charge Calculation on an HFMI Mortgage | |
|---|---|
| Prepayment amount | $100,000 |
| Annual interest rate | 5% |
| Prepayment charge of 6 months’ interest | 181 days/365 days |
| Prepayment charge formula | Prepayment amount x annual interest rate x 181 days/365 |
| Prepayment charge amount | $2,500 |
Note: There is no prepayment charge during the first 90 days and last 90 days of an HFMI mortgage term.
Calculate a
Prepayment Charge
Try the Mortgage Prepayment Charge Calculator to understand how much it could cost to pay off your migrated mortgage early.
Try the Calculator (Opens link in new window)Compare Mortgage Types
See how different mortgages compare and whether prepayment charges could potentially impact you.
Fixed Rate
Interest rate is locked in for the full term of the mortgage
VS
VS
Variable Rate
Can be converted to a fixed rate mortgage at any time to take advantage of falling interest rates
Open Term
Can be repaid either in part or in full at any time without prepayment charges
VS
VS
Closed Term
There will be a prepayment charge to renegotiate the interest rate or if you pay off more than 20% of the original principal amount of the mortgage prior to the end of the term.
Long-term
Typically have an interest term of 3 years or longer
VS
VS
Short-term
Typically have an interest term of less than 3 years
Pay Off Your Mortgage Faster without a Prepayment Charge
If your mortgage payments are up to date, you have three options without having to pay a prepayment charge, provided that the combined total amount of extra payments and increased payments in a given year does not exceed 20% of the original principal amount of the mortgage.
- Option 1: On the anniversary date of your mortgage, you can make a lump sum payment of a minimum of $100 up to 20% of the original principal amount.
- Option 2: On any mortgage payment date, you can make an extra payment of a minimum of $100 up to the equivalent to the monthly amount of your mortgage payment.
- Option 3: Once a year, you can increase your regular mortgage payment by up to 20% for a 12-month period.
