Hundreds of people are breaking their mortgages and switching into lower, variable rates. When you are deciding whether or not to break your mortgage there are a few things you should consider first.
- Your rate.
If your rate 1-2% higher than what is on the market now, it is probably time to switch to a lower rate.
- Your penalty to break.
This is the penalty that protects lenders against losses. There are different ways that this is calculated and it depends on if you are with the Bank or with a “Non-Balance Sheet” lender.
This process can get confusing without the help of a Mortgage Agent. Working with MorCan Direct will provide you with access to some tricks to reduce these penalties and keep your mortgage lender in check when they are calculating penalties.
The number one way to save the most money on your mortgage is to stay informed. Below is an overview of how the penalty to break your mortgage is calculated. However, we highly suggest that you speak with a mortgage agent to see if breaking your mortgage is the right choice for your financial situation.
When you go to break your mortgage, you could end up paying 1 of 2 calculated penalties: 3 Months Interest Penalty or IRD Penalty. This is decided based on which one is higher.
1) 3 Month Interest Penalty
- The three month interest penalty is calculated by taking your current mortgage balance multiplying it by your current interest rate and multiplying that by 3.
2) Balance Sheet Lender (Bank) IRD Penalty
- You start with the original undiscounted or “posted” mortgage rate. Let’s say 5 year fixed rate at 6%, but the bank offered you a 2% discount, so your rate was actually 4%.
- Then figure out how many years you have left in your term. Let’s say 2 years, and the 2 year fixed rate is 3%. However, since your original rate was discounted this one is too by the same amount. That makes it 1%.
- You will also need to figure out the difference between these two rates (4% – 1% = 3%).
- Your penalty will be 3% multiplied by your mortgage amount – to make the math easy let’s say it’s $100,000. Then this will be multiplied by the remaining amount of time left in your term (2 years).
- ($100,000 x [4%-1%]) x 2 = $6000
3) Non-Balance Sheet Lender IRD Penalty
- This is calculated almost the same as the Balance Sheet Lender, except for one critical change. Non-Balance Sheet Lenders do not have “posted” and “discounted” rates. The rate you get is the rate they use to calculate the penalty.
- So, if you got a 5 year fixed rate at 4%, using all the same other numbers to calculate the penalty it would equal:
- ($100,000 x [4%-3%]) x 2 = $2000
- For this reason alone, it is worth looking into using Non-Balance Sheet Lenders to finance your mortgage.
Banks do not have your best interest in mind when they calculate your mortgage rate or penalty to break your mortgage. Banks are profit centers that profit only by making a spread on the difference between the rate of interest that they pay you for your deposits and the rate of interest they charge you to borrow money. The more money you have on deposit with the Bank, the more valuable you are as a client, and therefore the better the interest rate you are offered on your debts. With a Mortgage Broker every client has access to those great rates.
As always, a competent Mortgage Broker is your best source of information. If you’re considering breaking your mortgage, it’s best to speak to a Mortgage Specialist before making any final decisions. We can tell you if and when it makes sense to break a mortgage, without breaking the bank.