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19 Dec

Does it make “Cents” Breaking Your 5-year Mortgage for a Lower Interest Rate?


Posted by: Adam Sale

Does it make “Cents” breaking your 5-year Mortgage for the current low interest rate?

Many home-owners are asking if it’s worth breaking their 5-year fixed mortgage to take advantage of the low interest rates?

As always, it depends.

Most home-owners asking this question arranged their mortgage in late 2017-2018, when mortgage rates were averaging 3.5%. This means they are between 1-2 years into their 5-year mortgage term.

The longer the length left in a mortgage term, the higher the pre-payment penalty is for breaking the contract.

Fixed-rate mortgages have a clause in the pre-payment section stating the penalty for breaking the contract is the greater of either a 3-month interest charge, or an Interest-Rate Differential penalty.

Generally speaking, if there is more than a year left in the mortgage term the Interest-Rate Differential is used. Typically, the IRD charge is substantially more than paying 3-months of interest.

One of the biggest misconceptions about mortgages is

all Interest-Rate Differentials are the same,

 this is false.

The Big 5 banks have the strictest IRD charges on the market, often thousands of dollars more than a credit union or wholesale-banks IRD charge.

Mortgages at Big 5 banks are designed to penalize you more for breaking your mortgage than the savings you will gain from a monthly mortgage payment at a lower rate.

If, instead, you are with a credit union or wholesale bank there are scenarios where it may be advantageous for you to break your mortgage, depending on how these individual lenders calculate their Interest-Rate Differential charge.

If you are curious on what it costs to break your specific mortgage, give me a call I’d love to find out if there is an opportunity to save you some money.

Thanks for reading,

Adam Sale