If you’re watching Canada’s interest rate tumble faster than anywhere else in the world right now, you’ll either be delighted you have a variable lending rate or annoyed you took a gamble on a fixed rate.
For those who gambled and lost, the temptation is to call the lender and immediately ask for a new deal.
As an experienced real estate agency in your area, we know clients who’ve done this and been shocked at the financial penalties for trying to get out of their deal.
With the latest 0.5% cut by the Bank of Canada reducing our mortgage costs by 1.25% in just a few months, it’s surely tempting to explore the possibility of either renegotiating a fixed-rate term or opting for a variable deal if you believe rates will fall further.
But be warned: Breaking a fixed-rate mortgage agreement can cost thousands of dollars.
Lenders usually charge a levy of three months’ interest or a calculation called “the interest rate differential (IRD)” as a penalty for breaking your fixed-rate deal
You won’t be surprised to learn the bank will opt for whichever variation is the most expensive.
Why? Lenders don’t want to lose a customer who’s locked into paying a higher-than-market rate.
Think carefully before deciding to ditch your existing loan. The penalties could be more than the savings you’d make. Here’s a breakdown of the common penalty fees:
Fixed-Rate Mortgages
Interest Rate Differential (IRD): This is the most common penalty for breaking a fixed-rate mortgage. It’s calculated based on the difference between your current interest rate and the rate the lender could get if they re-lent the money for the remainder of your term.
Three Months’ Interest: Some lenders may charge a penalty equal to three months’ worth of interest payments.
Variable-Rate Mortgages:
Three Months’ Interest: This is the most common penalty.
Additional Potential Costs: Fees for administration, appraisal, reinvestment and a mortgage discharge fee to remove your current mortgage and register a new one.
NOTE: The information in this article is general in nature and provided as a market overview only. Always consult your financial advisor or accountant for advice specific to your personal circumstances.