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### What is a prepayment penalty?

A prepayment penalty is a sum of money paid to your lender (like your bank) if:

- You decide to payoff or renew the mortgage before the end of its term, and/or
- You pay down the mortgage more than allowed by the mortgage contract.

The prepayment penalty is only applicable to closed-term mortgages (not open-term mortgages).

Prepayment penalties can be calculated in two different ways, depending on the type of mortgage you have, as well as the amount of time left on your mortgage term.

### The two main types of mortgages

#### Fixed-rate mortgage

In a fixed-rate mortgage, the interest rate doesn't change over the term of your contract. That means your interest rate and mortgage payments are constant for your mortgage term.

#### Variable-rate mortgage

In a variable-rate mortgage, the interest rate is based on your bank or financial institution's prime lending rate. A variable rate will be usually quoted as Prime plus or minus a specified percentage, such as "Prime + 0.15%" or "Prime - 0.25%". Though the prime lending rate may change, the mark-up or mark-down from Prime will stay constant over your term.

If you don't know what kind of mortgage you have, take a look at your Annual Mortgage Statement (which you should get in the mail every January).

Learn other mortgage terms you should know

**The rest of this article explains how the penalties are calculated. If you just want an estimate of your penalty amount (and don't really care about the explanation), visit our** quick and easy Prepayment Penalty Calculator

### If you have a fixed-rate mortgage

**NOTE:** If your fixed-rate mortgage terms is/was **greater than five years** and it has gone past the **60th month** of its term, the maximum prepayment penalty you will be charged is **three month's interest**.

For a fixed-rate mortgage, the prepayment penalty is either **three months' interest** OR the value of the **Interest Rate Differential (IRD) for the remaining term of your mortgage** (whichever is greater).

The IRD is the difference between your **actual mortgage interest rate** and **ATB's current mortgage interest rate for the term closest to the length of time remaining in your mortgage term**. (So, if you have three years left in your term, your actual mortgage rate would be compared to ATB's current rate for a three-year fixed mortgage.)

This difference is then multiplied by the mortgage balance and residual term.

#### Complete both calculations below to see which one results in a greater penalty:

IRD CALCULATION |
EXAMPLE |

_________(A) = annual interest rate as a decimal _________(B) = current annual rate for a new mortgage with a term closest to the term of the remainder of the term of the loan at the time being repaid _________(C) = (A) – (B) the difference between the rates _________(D) = amount to be prepaid _________(E) = number of months remaining in the loan term _________ (F) = (C X D X E) divided by 12 gives the estimated interest rate differential amount. |
(A) **0.04** = annual interest rate as a decimal (**4%**) (B) **0.0299** = current annual rate for a new mortgage with a term closest to the term of the remainder of the term of the loan at the time being repaid (**2.99%** on a three-year term) (C) **0.0101** = (A) – (B) (D) **$100,000.00** = amount to be prepaid (E) **36** = number of months remaining in the loan term (F) **$3,030.00** = estimated interest rate differential amount |

3 MONTHS' INTEREST CALCULATION |
EXAMPLE |

_________(A) = annual interest rate as a decimal _________(B) = amount to be prepaid _________(C) = (A) x (B) _________(D) = (C) divided by 4 gives the estimated 3 months' interest |
(A) **0.04** = annual interest rate as a decimal (**4%**) (B) **$100,000.00** = amount to be prepaid (C) **$4,000.00** = (A) x (B) (D) **$1,000.00** = (C) divided by 4, the estimated 3 months' interest |

In this example, the IRD calculation is **higher** than three month's interest, so your prepayment penalty would be **$3,030**.

### If you have a variable-rate mortgage

For a variable-rate mortgage, your prepayment penalty is **always** the three month's interest calculation. The table below can help you calculate it:

3 MONTHS' INTEREST CALCULATION |
EXAMPLE |

_________(A) = annual interest rate as a decimal _________(B) = amount to be prepaid _________(C) = (A) x (B) _________(D) = (C) divided by 4 gives the estimated 3 months' interest |
(A) **0.04** = annual interest rate as a decimal (**4%**) (B) **$100,000.00** = amount to be prepaid (C) **$4,000.00** = (A) x (B) (D) **$1,000.00** = (C) divided by 4, the estimated 3 months' interest |

Math not your strong suit? Click here to use our Prepayment Penalty Calculator

If you have any questions about mortgage prepayment penalties, give us a call at 1-888-404-4646 or stop by your local branch.

#### Other articles you may be interested in:

How No Bull Mortgages can lower your prepayment penaltyHow to avoid (or lower) mortgage prepayment penaltiesHow to pay down your mortgage faster6 mortgage terms you need to know