How much will it cost to break your mortgage?

What penalty will you pay to break?

Breaking a fixed-rate term usually incurs a higher penalty than breaking a variable-rate term because fixed rates have different managing costs for lenders.

There may be additional fees for the break, depending on the lender.

A fixed rate usually has a higher IRD penalty:

Your lender will use the highest of two calculations for your penalty, the IRD (Interest Rate Differential) or 3-month interest — IRD is usually the highest.

How an IRD is typically calculated (can vary by lender):

• Using your original rate (the lender will choose either the original-contract or original-posted rate), the total interest remaining in the term is subtracted from the interest remaining at the lender's current rate (contract or posted, depending on the lender).
• Here's a breakdown to use on a calculator: Subtract your original (contract or posted) rate from the bank's current rate, and multiply by the years remaining on your term, then again by your mortgage size, then divide by 100.

A variable rate usually has a lower 3-month interest penalty.

A variable-rate mortgage only uses the 3-month interest calculation and is much simpler:

• Take how much interest you currently pay in a month (not including principal) and multiply it by 3. (That's what you'll pay.)

Does it make sense to break for a lower rate?

Let's look at three client examples.* Tom, Alex and Nancy came to True North Mortgage for help to see if breaking their term to get a lower rate made financial sense (to save more).

Tom: Is it worthwhile to break my 5.75% fixed-rate mortgage?

Tom got his $100K mortgage 2 years ago at a 5-year fixed rate of 5.75%. He saw a rate being offered at 3.99% and wanted to know if it would be worthwhile to break his current term to get that lower rate.

When Tom went to talk to his current bank, he quickly realized that he had to pay a higher Interest Rate Differential (IRD) penalty rather than a lesser 3-month interest penalty. This IRD assessment is typical of most lenders, and he wasn't happy about the added cost. So, he came to us for unbiased help to figure out his best option.

In Tom's case, here are the numbers:

• With a rate of 5.75%, his bank's current rate to calculate the penalty on his remaining 3 years is 4.50%.
• So Tom's IRD penalty would be $3,750 (other admin or legal fees may apply).
• With his new rate of 3.99%, he would save $1,350 over and above the penalty.

Would Tom have to pay the entire $3,750 penalty out of pocket?

Most lenders will allow up to $3,000 to be added to the mortgage amount. So Tom would have to come up with the extra $750 on his own.

In this case, Tom decided it was worthwhile to make the switch (with our expert help), pay the extra penalty amount and save more with the lower rate.

Alex: Is it worthwhile to break my 5.75% fixed-rate mortgage?

Alex has a larger mortgage than Tom — a $600K mortgage 2 years ago, with 3 years left on their current term. Already a client of ours, they also wanted to switch to a lower rate of 3.99% (fixed rate) and contacted their broker to find out if it makes savings sense.

For Alex, here are the numbers:

• With 5.75%, their bank's current rate to calculate the penalty on the remaining 3 years is 4.50%.
• Alex's IRD penalty would be $22,500 (other admin or legal fees may apply).
• With his new rate of 3.99%, he would save $8,099 over and above the penalty.

But because Alex can't afford to pay the extra $19,500 out of pocket (after $3,000 is absorbed into the mortgage loan), they decided to wait out the term and get their best rate through us at renewal time — with no penalty to pay.

Nancy: Should I switch my variable rate of 5.75% to a lower fixed rate?

Nancy has a $500K mortgage with 3 years remaining in her 5-year variable-rate term and was looking to switch to a lower fixed-rate offer of 3.99%.

Here are the numbers for Nancy to switch:

• Calculated at her current variable-rate term of 5.75%, to break her term completely (switch lenders), the 3-month interest charge would be $7,103.
• Nancy also has the option to convert into a fixed rate with the same lender, without penalty. However, her bank offered a much higher rate than the other lender's 3.99%.
• The lower rate of 3.99% (remaining term of 3 years) would save her $18,395, over and above the penalty.

Nancy decided to pay the entire $7,103 penalty upfront (rather than opt for $3,000 of it to be added to her mortgage) and switch to a lower fixed rate, not only to save money but for easier budgeting with fixed payments during her term.

You may not have a choice to break your mortgage.

If you have to move or sell during your term, which can happen in the ordinary course — your broker can help you navigate the details and find your best rate and options if you need another mortgage.

Mortgages can be complicated, but we make the process easy. Check out our 5-star reviews for how we've helped other clients save money, time and stress.

Want to pay out your mortgage entirely?

You'll pay the penalty that corresponds to your rate type, plus a discharge and other admin fees (depending on the lender).

Get the right advice (and rate) to save the most.

Even if you see a better rate (of course, we can get your best rate for which you qualify), it may not always make financial sense to switch before your term is up.

Whether you want to break or need a better choice at renewal time, we can help you make the decision that's right for you.

Get a helpful mortgage renewal reminder here.

Anywhere you are in Canada, our highly trained, expert brokers are salaried and non-commissioned for truly unbiased advice. We can help you online, over the phone, at a store — or a mobile broker can come to you.

*Examples are for illustration purposes only. Please contact your expert True North Mortgage broker for your exact numbers.