With mortgage rates still at historic lows, many people have and are considering breaking their current mortgage and renewing now before rates rise any further.
Perhaps you want to free up cash for things such as consolidation, child’s education, vacation or home renovations Or maybe just get a lower rate and pay your mortgage off faster.
In some cases, the penalty can be quite substantial if you aren’t very far into your mortgage term, but we can determine if breaking your mortgage now will benefit you long term. Most times it does.
Early payout penalties can either be 3 months interest or IRD which is the difference between the interest rate on your mortgage contract and today’s rate, which is the rate at which the lender can re-lend the money. With lower rates the IRD tends to be greater than three months’ interest. Why? Because this is a way for banks to recuperate any losses, for some people, breaking and renegotiating at a lower rate without careful planning can mean they come out no further ahead.
Keep in mind penalties vary from lender to lender and there are different penalties for different types of mortgages. In addition, the size of your initial down payment and whether you opted for a “cash back” mortgage can influence penalties.
While breaking a mortgage and paying penalties based on the IRD may sometimes result in a break-even proposition in the short term, if you look at the big picture, you’ll see that the true savings are long term – as we know that rates will be higher in the near years to come. Your current goal is to secure a long-term rate commitment before it’s too late, and there lies the significant future savings.