A client with a $500,000 mortgage at 3.5% interest wants to make an annual prepayment of $15,000. If their mortgage allows 15% annual prepayment privileges, what is the maximum additional amount they can prepay this year?
Correct Answer
D) $60,000
Most mortgage prepayment privileges are calculated as a percentage of the original principal amount, not the current balance. With a 15% annual prepayment privilege on a $500,000 mortgage, the maximum annual prepayment is $75,000. Since they want to pay $15,000, they can prepay an additional $60,000 ($75,000 - $15,000) this year.
Why This Is the Correct Answer
Option D is correct because prepayment privileges are typically calculated on the original principal amount. With a $500,000 original mortgage and 15% annual prepayment privilege, the maximum annual prepayment is $75,000 (15% × $500,000). Since the client wants to make a $15,000 prepayment, the additional amount they can prepay is $60,000 ($75,000 - $15,000). This calculation method is standard across most Canadian mortgage products and aligns with typical lending practices under provincial mortgage regulations.
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