First the lender will get the non-discounted rate that was posted the day you signed your mortgage agreement 2 years ago.You decided to break your mortgage contract and so this is how the IRD is calculated. Of those 5 years you have 3 years left on your agreement with a current principal value of $400,000. You have a 5-year fixed rate mortgage with a current interest rate of 3.25%. We know, it's a bit confusing! Let us make it easier to understand by calculating the IRD for a hypothetical scenario. Alternatively, IRD is calculated as the difference between interest on your prepayment amount for the rest of your term at the non-discounted rate you originally signed your agreement subtracted by the amount of interest owing calculated at the closest posted rate your lender has at the current moment for the amount of time that is left on your agreement.įor example, if you had 2 years left on your 5-year fixed rate, they would look up their most up to date 2-year fixed mortgage rate. The IRD is the difference between the interest you owe to your lender for the remainder of your mortgage contract and the interest your lender would receive by lending this money for the rest of your term with the same discount you were given. The penalty is the greater of either the total calculated by using Method 1, as described above, or the result of a calculation called the Interest Rate Differential (IRD). The calculation is a bit more complicated. This method is applied to a fixed-rate mortgage. Method 2: Interest Rate Differential (IRD) Some closed-term agreements allow you to pay off 10%-20% of principal once a year but outside of that, you will have to pay your lender a penalty fee for doing so. As mentioned, the main difference with a closed-term mortgage is you don't have the freedom to payoff your principal when you want. In Canada, the standard term is about 5 years. That being said, a closed-term mortgage is one that you take out for a specified amount of time. Since most individuals don't plan on paying off their mortgage early, they decide to go for the lower closed-term rate. This benefit is great, but most people usually opt for a closed-term mortgage agreement because an open-term mortgage usually has a higher interest rate. You still have to pay your principal and interest amounts every month but you can make additional payments without having to pay a prepayment penalty (A penalty associated with a closed-term mortgage). With an open-term mortgage you can pay off the entire mortgage amount whenever you want. The major difference is the penalties associated with a closed-term mortgage. Principal - The principal is the amount you borrow before any fees or accrued interest are factored in.What is the difference between an open- and closed-term mortgage? Your loan’s principal, fees, and any interest will be split into payments over the course of the loan’s repayment term. Loan term - Your loan term is the period over which you will make repayments. You can use Bankrate’s APR calculator to get a sense of how your APR may impact your monthly payments. This rate is charged on the principal amount you borrow.ĪPR - The APR on your loan is the annual percentage rate, or cost per year to borrow, which includes interest and other fees. Interest rate - An interest rate is the cost you are charged for borrowing money. Common types of unsecured loans include credit cards and student loans. Unsecured loans don’t require collateral, though failure to pay them may result in a poor credit score or the borrower being sent to a collections agency. In exchange, the rates and terms are usually more competitive than for unsecured loans. Common examples of secured loans include mortgages and auto loans, which enable the lender to foreclose on your property in the event of non-payment. Secured loans require an asset as collateral while unsecured loans do not.
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