Would now a good time to break your mortgage and refinance?
This is a really common concern– when should I break my existing mortgage and refinance for a current best mortgage rate? It’s best to initially weigh out the costs.
Breaking your Mortgage
A Canadian mortgage rate agreement is a fully committed contract. There is an out clause, however it comes at a cost.
How Much is my Mortgage Penalty?
Typically the cost is determined based upon either three months worth of interest payments, or the interest rate differential (IRD).
Step 1: Calculate your IRD (Interest Rate Differential)
1) Use the principal balance and multiply it by the difference between your existing 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 obtain the approximate IRD owed.
Step 2: Calculate 3 Months of Interest
Just simply multiply the amount of interest you would owe on the present mortgage amount. Multiple this by 3.
Step 3: Find out the Penalty you Would Pay
When it comes to a fixed rate you would pay the greater of the IRD, or 3 months of interest. While in a variable rate, you would generally pay 3 months of interest. Contact your mortgage broker or lender to identify your specific required payments.
Step 4: Calculate Your Savings
1) Calculate the interest on your current mortgage rate.
2) Calculate the interest for your new mortgage rate.
3) Calculate your savings.
Step 5: Find out if it is Worth It
Decide if changing is worth it by comparing your expenses to your savings.