Posted by: AdminS
Many people have inquired about when is the best time to break their fixed mortgages. Most are surprised and upset with their current bank due to the unexpected Interest Rate Differential (IRD) penalty being charged due to today’s lower rates. IRD is a formula that is used to calculate the penalty that will be paid when breaking a fixed rate mortgage.
Clients are not always made aware that all fixed rate mortgages include a clause that states if you were to break the contract that the higher of the IRD or 3 months of interest will be charged as a penalty. This past year, due to fixed rates being at an all-time low, it is more common that many individuals have seen that the IRD has taken precedence in the penalty amount.
Even though there can be a solution here to counter the exorbitant penalty, in my opinion they are not the only clients who should be reviewing their current mortgage to find savings with the lower rates. As stated in this article from the Canadian Mortgage Trends website, this is the opportune time to break your mortgage if you have a variable rate product and took it out some time last year; as you would have most likely attained a rate at Prime without any discount or even at Prime plus.
With the recent increase by the Bank of Canada, the current Prime rate today is now at 3% and depending on what your variable rate was at you could possibly be paying more than this. Today’s lenders are currently offering the variable rate product anywhere between Prime minus 0.65 – 0.70 which will result to significant interest savings over a 5 year term. Since the penalty on a variable mortgage will always only be 3 months of interest, it is much easier to determine an approximate penalty amount as opposed to the ever complicated and always shocking IRD. The 3 months of interest penalty will be well worth the substantial savings that you can attain; as outlined in this article you could save over $6300 on a mortgage of $250,000 even after the penalty and discharge fee is applied.
So if you are currently in a variable rate mortgage and if your mortgage is set at Prime or in the neighbourhood of it, then it may be the right time to review your mortgage situation to see how much you can save.