A client has a $500,000 mortgage with a 3.5% rate, 25-year amortization, and 5-year term. After 3 years, they want to break the mortgage when rates have dropped to 2.8%. Which factor would most significantly impact their prepayment penalty calculation?
Correct Answer
D) The interest rate differential and remaining term
For fixed-rate mortgages, the prepayment penalty is typically the greater of three months' interest or the interest rate differential (IRD) for the remaining term. Since rates have dropped significantly, the IRD calculation would likely result in a substantial penalty.
Why This Is the Correct Answer
Option D is correct because prepayment penalties for fixed-rate mortgages in Canada are calculated as the greater of three months' interest or the Interest Rate Differential (IRD). The IRD considers both the difference between the original rate and current rates, and the remaining term length. With rates dropping from 3.5% to 2.8% and two years remaining, the IRD calculation would likely exceed three months' interest, making it the determining factor. This reflects standard industry practice across Canadian financial institutions and is governed by federal banking regulations.
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A client has a gross annual income of $80,000 and monthly debt payments of $500. Using a 32% gross debt service ratio, what is their maximum allowable monthly housing payment?