With interest rates so low many home owners are wondering if breaking their mortgage is worth it. In most cases there are penalties, but do the benefits outweigh the costs?
The big banks are offering five year mortgages at 2.99%. At some banks (BMO) you can even lock into a ten year fixed rate mortgage at 3.99%!
It’s hard to resist that sort of security of knowing what exactly you’ll be paying for the next decade.
But is it worth it?
Basically the answer is: it depends. The first step is to sit down with your banker and find out if the savings from paying the lower rates will outstrip the penalties of mortgage breaking.
When you cancel or break a mortgage you will be charged either three months’ interest or the Interest Rate Differential (IRD), whichever is higher. IRD is an arbitrary number based on a formula the bank has predetermined to ensure the lender breaks even. Not all lenders use the exact same formula. You have to go to your financial institution directly to understand what the Interest Rate Differential is and what your penalty will be.
Depending on how far into your term, your mortgage balance and it’s associated interest rate it may or may not make sense to make the break. There are of course legal and appraisal fees as well as the penalty.
One way to decrease your penalty is to maximize your mortgage prepayments thus lowering your mortgage balance. That way the amount your penalties are calculated on is lower.
Another way is to renew early and blend the your existing mortgage with a new rate. Your bank will like this and you will get a lower rate.
Either way, your first step is to find out what the penalties are. Your first step is to call your banker and see what’s what. It could be worth thousands of dollars.