Is now a good time to break your mortgage and refinance?

This is a very common question – when should I break my current mortgage and refinance for a new best mortgage rate?  It’s best to weigh out the costs first.

Breaking your Mortgage

A Canadian mortgage rate agreement is a committed contract.  There is an out clause, but it comes at a price.

How Much is my Mortgage Penalty?

Generally the fee is calculated based on either three months worth of interest payments, or the interest rate differential (IRD).

Step One: Calculate your IRD (Interest Rate Differential)

1) Take the principal balance and multiply it by the difference between your current mortgage rate, and the new low mortgage rate.

2) Divide that number by 12.

3) Multiply that number by the remaining months in your term to get the approximate IRD owed. 

Step Two: Calculate Three Months of Interest

Simply multiple how much interest you would owe on the current mortgage amount owing. Multiple this by three.

Step Three: Determine the Penalty you Would Pay

In a fixed rate you would pay the greater of the IRD, or three months of interest. In a variable rate, you would normally pay three months of interest. Check with your mortgage broker or lender to determine your exact payment requirements.

Step Four: Calculate Your Savings

1) Calculate the interest on your current mortgage rate.

2) Calculate t interest for your new mortgage rate.

3) Calculate your savings. 

Step Five: Determine if it’s Worth It

Determine if switching is worth it by comparing your costs to your savings.