Low Rates Make You Want To Break Your Mortgage?

If you are one of the estimated three million Canadian households that currently have a fixed-rate mortgage, you're probably wondering whether it's worth breaking your mortgage to get in on this super-low mortgage-rate action.

You may also be in a Variable Rate Mortgage that might benefit from locking in now.

The right advice is really…..It depends!

There's the penalty to consider you pay if you do want to make a change.

The cheapest fixed-rate mortgages are closed mortgages – meaning that you can't escape the interest rate you agreed to pay for five years unless you pay the lender compensation for the interest it would lose by letting you switch from a higher interest rate mortgage to a lower one.

There are two main variables that determine the prepayment penalty to get out of a fixed-rate mortgage early:

• The difference between your higher-rate mortgage and the current mortgage rate, known as the interest rate differential penalty; and
• The amount of time remaining in your mortgage's term. The longer the time, the bigger the penalty.

It's a complicated calculation – made all the more so because financial institutions have different ways of calculating penalties.

Some lenders base their calculation of interest rate differentials on the posted rate (the current posted rate for a fixed five-year mortgage, for example, is 5.29 per cent – far above the actual 2.99 per cent lenders are now charging.) Some lenders, though, use their discounted rates to do the calculation.

If you want to switch, the only way to know for sure whether you'd be further ahead is to ask your current lender how much the penalty would be to release you early from your mortgage.

Then give us a call. We have a state of the art calculator that will show you whether it’s worth it to switch.