Interest rates can have a big impact on your finances, especially if rates have dropped since you locked in your mortgage. You might be wondering: Should I break my mortgage to take advantage of lower rates? It’s a big decision, and there’s a lot to consider before making your move. Let’s break it down.
Are You Allowed to Break Your Mortgage?
Yes, in Canada, you can break your mortgage before the term ends, but it’s not as simple as just walking away. Most lenders allow you to pay off your mortgage early, but doing so comes with conditions and penalties.
To start, you’ll need to check your mortgage agreement. Fixed-rate mortgages and variable-rate mortgages have different rules about early termination, so it’s essential to know what applies to you. Some lenders may also require you to refinance with them if you want to break your current mortgage.
Penalties for Breaking a Mortgage
One of the biggest factors to consider is the penalty for breaking your mortgage. These penalties can vary significantly based on the type of mortgage you have:
Fixed-Rate Mortgages: The penalty is usually the greater of three months’ interest or the interest rate differential (IRD). The IRD can be costly, especially if rates have dropped significantly.
Variable-Rate Mortgages: These typically have lower penalties—usually around three months’ interest.
In addition to penalties, there may be administrative fees or costs to discharge your mortgage. Before making any decisions, ask your lender for a detailed breakdown of the costs involved.
When Does It Make Sense to Break Your Mortgage?
Breaking your mortgage needs to make financial sense. Here are a few scenarios where it might be worth considering:
1. The New Rate Will Save You More Than the Penalty
If the interest rate savings over the remainder of your term outweigh the cost of breaking your mortgage, it could be a smart move. To figure this out, calculate how much you’d save with the lower rate compared to the penalty and other fees. A mortgage broker can help with this math to ensure it’s worth it.
2. You’re Refinancing for Other Reasons
Sometimes, breaking your mortgage isn’t just about chasing lower rates. If you’re planning a major renovation, consolidating debt, or buying a new home, refinancing at a lower rate can make sense even with a penalty.
3. You’re Selling Your Home
If you’re planning to move before your term ends, you may need to break your mortgage anyway. In this case, the penalty might be unavoidable, but it’s still worth exploring whether a new lower rate could offset some of the cost.
What Should You Do Before Breaking Your Mortgage?
Run the Numbers: Work with your lender or a mortgage broker to calculate the total cost of breaking your mortgage versus the potential savings.
Understand Your Agreement: Know the terms and conditions of your mortgage, including the exact penalties and fees involved.
Shop Around: If you’re refinancing, compare offers from multiple lenders to ensure you’re getting the best rate.
Consider Your Long-Term Plans: If you plan to move soon or make other changes, think about how breaking your mortgage fits into your broader financial goals.
Breaking your mortgage to take advantage of lower rates can be a good financial move—but only if the numbers work in your favour. It’s a decision that requires careful consideration of the penalties, potential savings, and your long-term goals. If you’re thinking about breaking your mortgage, talk to a mortgage broker or financial advisor to ensure you’re making the best choice for your situation!
