Mortgage Articles

Breaking Your Mortgage

Should you break your mortgage for a lower rate?

There are a few factors to consider when thinking about breaking your mortgage:

• How long you have left on your current contract
• How much will you save with a new lower rate
• How much you will have to pay your current lender to break your existing mortgage

Once you have thought about these things, it comes down to simple math and common sense.

Frequently Asked Questions

The main reason to consider breaking your current mortgage is to get a better mortgage interest rate. For example, you may be locked into a high interest rate and current market conditions have created a rate that is drastically reduced. In Canada, the five-year rate in 2008 was over 6%, but then in 2009 it dropped to around 3.5%. So if you locked in when the interest rate was 6%, you definitely should have considered breaking your mortgage the following year to take advantage of the lower mortgage rate. Breaking your mortgage could save you hundreds of dollars in interest charges per month.

As a basic rule of thumb, if breaking your mortgage results in a 2% to 3% interest rate savings, the change makes sense. Less than that may not make sense because when you break your mortgage contract or transfer your mortgage, you're faced with a payout penalty charge to reimburse your financial institution for lost investment return. Sometimes the difference in mortgage payment alone can make the change worth it, but it may not be completely determined by the interest rate alone. Talking to a mortgage broker will help you determine if the move makes sense.

First, be sure to check the "prepayment" clause and the penalty charges in your current mortgage to determine what costs may be associated with breaking your mortgage contract early.

Generally, the less time remaining on your existing term, means a lower penalty cost to break the mortgage. And, the longer the term left on your mortgage, likely means greater penalties. This may make transferring your mortgage less desirable, especially if you already have a low interest rate. Being informed will help you make the right decision.

If you only have a year or so left on your existing mortgage, it might be best to wait, especially if rates look like they might drop and if the penalty charges are too high. If you still have a long time left on your contract and are afraid rates will go up, break your mortgage and get the lower rate! Sometimes an extra three or four years of insurance is better than waiting out your existing term only to find the rates are much higher. A mortgage broker can find you a lender that will make it worthwhile.

According to SuperBrokers.ca, the average online mortgage is around $125,000. If you take out a five-year term with an interest rate of 6% on that amount, you will pay approximately $35,000 in interest charges for the term. Reducing your interest rate to 3.5% over the same term drops your interest payments to approximately $20,000. That is a savings of nearly $15,000. Using this same formula, calculate your own potential savings. Once you have done that, simply subtract your payout penalty. This will give you an estimate of how much money you will save. Your savings could range between a few of hundred dollars in interest to tens of thousands of dollars in interest.

Alberta Equity has helped over 50,000 people find and qualify for the best mortgages in Canada for over ten years. We do all of the heavy lifting and ensure that you get the best mortgage rates and product features available. Apply online for a free, no obligation consultation or alternatively, view our products and services.