# Should i break my mortgage?



## latebuyer (Nov 15, 2015)

I found it will cost only 2000 to break my mortgage and sign in at a reduced rate. The problem is i only have a year left on my mortgage and would only be saving around 500 this term. So i would basically be banking on the fact interest rates would go up when i renew. Last time i thought interest rates were going up i made a costly mistake and locked in at a 5 year term and interest rates went down. Does anyone have a crystal ball or can you think of another way to look at this? I don’t want to make another costly mistake. I’m thinking the delta variant is the wild card here and maybe mortgage rates will stay down but i could be wrong.


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## like_to_retire (Oct 9, 2016)

I wouldn't pay $2000 to break a mortgage that only had a year left in the term. I can't imagine rates will rise over the next year, but after that I suspect they will begin to increase. Sit tight.

ltr


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## depassp (Mar 22, 2020)

I often question this when I'm offered promotional mortgage rates.

You can do the math yourself with a mortgage calculator:
Home Mortgage Calculator for Excel

Run out 2 versions of the calculator:

Your existing mortgage, using its current balance computed from the theoretical "switch" date. Take note of the total interest.
Theoretical "switch", using the "new" interest rate. Take note of the total interest, plus the cost of breaking your existing mortgage, minus any cash "promos" offered by the new lender.
Compare the 2 amounts and decide for yourself if it's worth switching.


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## james4beach (Nov 15, 2012)

like_to_retire said:


> I wouldn't pay $2000 to break a mortgage that only had a year left in the term. I can't imagine rates will rise over the next year, but after that I suspect they will begin to increase. Sit tight.


That's a very specific forecast.


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## Retiredguy (Jul 24, 2013)

Just take the 2000 and apply it to the mortgage now as a extra principal paydown now. Let next year take care of itself. Your renewal rate might be uncertain but the fact that your principal outstanding will be 2000 less is guaranteed.


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## Mortgage u/w (Feb 6, 2014)

Stop chasing the rate! So I have a crystal ball and it says that your rate will definitely 100% fluctuate over the life of your mortgage. The question remains "which direction will the rate go?".

You need to agree that if we take a traditional mortgage amortized over 25 years, you will need to renew its rate at least 5 times if one sticks to 5 year terms. The average of those rates is what you should care about. Not knowing where rates will go in the future, it then becomes critical to always choose the lowest rates available at the time of renewal. If you want to further increase your odds or increase you chance of ending with a low average, consider variable rates since when BoC does reduce their lending rate, you benefit as well. Variable rates have almost always carried the lowest rate.

So to bluntly answer your question - you'd be foolish to pay $2000 to save $500.


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## latebuyer (Nov 15, 2015)

Thanks, i’ve decided to not go ahead. Does anyone know if moving from biweekly to weekly would help? Or would i be better off making prepayments?


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## Spudd (Oct 11, 2011)

latebuyer said:


> Thanks, i’ve decided to not go ahead. Does anyone know if moving from biweekly to weekly would help? Or would i be better off making prepayments?


Anything you do to pay more against the mortgage balance will decrease your interest paid. 

Some banks allow lump sums (with various restrictions), others allow you to increase your regular payment amount. If either of these are available on your mortgage they should be more effective than changing the frequency.


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## Mortgage u/w (Feb 6, 2014)

latebuyer said:


> Thanks, i’ve decided to not go ahead. Does anyone know if moving from biweekly to weekly would help? Or would i be better off making prepayments?


if its not an accelerated payment, it wont do much. The biggest difference is when you switch from Monthly to accelerated Bi-weekly or weekly.

What will help is if you increase your payments. As your payments increase, amort decreases causing you to pay-off your mortgage quicker and save interest.


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## latebuyer (Nov 15, 2015)

It seems like most people thought i shouldn't break my mortgage. The cost of breaking the mortgage is now 1600. Does the fact that rates may rise sooner make any difference? I thought with quantitative easing being stopped yields were going to rise so fixed mortgage rates would go up. It doesn't mean that necessarily if rates rise, the fixed mortgage rates will rise, right?


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## Mortgage u/w (Feb 6, 2014)

latebuyer said:


> It seems like most people thought i shouldn't break my mortgage. The cost of breaking the mortgage is now 1600. Does the fact that rates may rise sooner make any difference? I thought with quantitative easing being stopped yields were going to rise so fixed mortgage rates would go up. It doesn't mean that necessarily if rates rise, the fixed mortgage rates will rise, right?


Initially, you were to pay $2000 to save $500. Now, its $1600 to save $500. Still not a good deal.

Not sure who 'most people' are but either they have incorrect figures, or you have not provided correct figures in your post.

If I understand correctly, you are banking on the fact that you will recuperate your loss over the next term that you will secure at a seemingly lower rate. That's a big gamble. You are literally in a double-or-nothing situation which is not a term I would associate with mortgages.

What if rates fall further? Would you be willing to take another loss?


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## latebuyer (Nov 15, 2015)

Yes, that is correct i would hope to recoup the cost over the next term which would be risky. I wouldn't be happy if i didn't recoup my cost but now in the future i'll be looking back and wondering if i should have broken my mortgage if rates go up. With variable i would save more but i guess the interest rate is supposed to go up beginning next year. The only thing i can say is rates have a ways to go to get to 3.39.


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## Money172375 (Jun 29, 2018)

Some institutions will allow you to renew early without penalty. I think some will allow it up to 6 months early.


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## latebuyer (Nov 15, 2015)

Thanks, with TD its 4 months and i can renew oct 1st of next year.


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## Money172375 (Jun 29, 2018)

latebuyer said:


> Thanks, with TD its 4 months and i can renew oct 1st of next year.


I’d check in with them at the 6 month mark…..I recall some mortgages were allowed greater early renewal privileges if they were considered “likley to Leave”. (Former Td employee)


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## latebuyer (Nov 15, 2015)

Thanks, since my mortgage is only 65,000 I have a very unattractive mortgage so this is probably unlikely!


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## londoncalling (Sep 17, 2011)

if it's only 65k I would not break the mortgage with a year left on term. that 2k can be used to pay down the principal either now or at renewal.


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## Mortgage u/w (Feb 6, 2014)

latebuyer said:


> Thanks, since my mortgage is only 65,000 I have a very unattractive mortgage so this is probably unlikely!



What was your original loan amount and do you know your current property value?

If you have sufficient equity and original loan amount hovered $350k, you can simply refinance to pay-off the existing loan penalty free.


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## razz (Oct 21, 2014)

I'm in a similar situation, but feel I should have locked in the rate 6 months ago, or summer of 2021, when rates were lowest. I know hindsight is 20/20.

Right now I have 10 months left in my first term (30 year amort.). Wondering if I should break the current term to lock in the current fixed rate. Seems the BoC will be raising rates starting this March 2nd. 2022. 

It would cost me $2300 to break the term and my current lender, First National, is offering me 3.14% for 5 year fixed. I assume it would be lower going through a broker.

When going through a broker does one have to be stress tested again, if they have an existing mortgage?

My early renew is in August, should I wait till then or break mortgage now?


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## londoncalling (Sep 17, 2011)

You would have to do the math to calculate the difference. If the interest saved is greater than the cost and hassle of renewing before August then proceed. I don't know the amount of your mortgage but my guess is that it isn't worth it. My mortgage is due in 2023 and the break fee was similar. It was not cost effective to do so for a couple hundred. Bank rates and BOC rate are not the same. The BoC rate is what the government lends money to banks not to individuals. The bank rates have already gone up. If we only see one or two hikes from B of C before summer my guess is it would hardly be worth it.


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## Mortgage u/w (Feb 6, 2014)

razz said:


> I'm in a similar situation, but feel I should have locked in the rate 6 months ago, or summer of 2021, when rates were lowest. I know hindsight is 20/20.
> 
> Right now I have 10 months left in my first term (30 year amort.). Wondering if I should break the current term to lock in the current fixed rate. Seems the BoC will be raising rates starting this March 2nd. 2022.
> 
> ...


Not sure what your current rate is but I will assume its a variable rate hovering roughly at prime minus 1.00%? Variable rates are currently just as low. So why would you lock-in 3.14% when you could stick with your variable rate well below 2%? 

My advice: leave your mortgage as is. Finish off your term and upon renewal, choose the variable rate again!

To answer your question about the stress test: if you decide to change lender, then yes, you will have to requalify. If its just a renewal without any additional re-advance, then no need to requalify.


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## razz (Oct 21, 2014)

Mortgage u/w said:


> So why would you lock-in 3.14% when you could stick with your variable rate well below 2%?


My mortgage is $310,000, every 0.25% interest rate hike is an extra $3,700 over the next 5 year term. To break current mortgage it will cost $2,700.

I'm concerned the BoC keeps talking about raising rates. If they raise rates another 4 times at 0.25% each, it will take 1 or 2 years for the variable rates to catch up to the 3.14% fixed rate. Then they can go even higher, depending how bad the inflation gets. Then what? If I want to break the variable-rate mortgage, won't the fixed rates by much higher than the 3.14% at that time?

I do like variable for the flexibility, i.e. selling home without paying the IRD penalty, at least that is my understanding.


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## Mortgage u/w (Feb 6, 2014)

@razz 
First, is your rate indeed a variable rate or is it fixed? You should know that if you have a variable rate, you could easily convert to a fixed rate penalty-free.

However, I would still advise you to stick with a variable rate. You need to understand that the spread between the fixed and variable is significant. BoC would have to raise their rate 25bps at least 5 times for the variable rate to catch up to the fixed. It would then have to increase another 5 times during your term for you to be at a slight disadvantage. I say 'slight' because depending on when the increase occurs, you need to consider you benefitted from the lower rate for X number of years.

Canadians seem to have the mentality of looking at their rate as though the rate is applicable for the life of the mortgage. It is not. 5 years goes by quickly. The right approach is to look at the average rate instead. Should a mortgage span an average of 25 years, you will typically renew 4 times. That's 5 rates you need to consider. So, if you keep locking in a fixed rate, you keep paying a premium to secure only 5 years of interest. Assuming your assumption is correct and rates rise, you will be faced with the same question upon renewal - low variable rate or pay a premium for fixed?

Aside the fact variable rates are lower, you need to consider penalty costs. Almost 3/4 of Canadians break their mortgage within the first 3 years of their term. The cost for breaking a mortgage is much more significant than a couple bps off your rate.


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## razz (Oct 21, 2014)

Mortgage u/w said:


> @razz
> First, is your rate indeed a variable rate or is it fixed? You should know that if you have a variable rate, you could easily convert to a fixed rate penalty-free.
> 
> However, I would still advise you to stick with a variable rate. You need to understand that the spread between the fixed and variable is significant. BoC would have to raise their rate 25bps at least 5 times for the variable rate to catch up to the fixed. It would then have to increase another 5 times during your term for you to be at a slight disadvantage. I say 'slight' because depending on when the increase occurs, you need to consider you benefitted from the lower rate for X number of years.
> ...


Currently on a fixed rate. Yeah I understand you save money going with variable most of the time, but these are uncertain times no. Keep reading the bond yield curves have inverted or are inverting, which means a recession is on the way. If a recession comes would it not be better to lock in a rate for the turbulent times? As rates continue to rise. 

Does the IRD penalty also apply when selling ones property?

Can't the BoC raise rates more than 0.25% at a time, like 0.5% if they want. My understanding is that they meet 8 times a year to announce interest changes. Five BoC meetings/announcements could be done within a year, and the variable rates would catch up to the fixed rates. 

Also for variable rates, when the rates rise, does the monthly payment increase? Or does only the interest portion of the monthly payment increase, decreasing the principal payment.


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## Mortgage u/w (Feb 6, 2014)

razz said:


> Currently on a fixed rate. Yeah I understand you save money going with variable most of the time, but these are uncertain times no. Keep reading the bond yield curves have inverted or are inverting, which means a recession is on the way. If a recession comes would it not be better to lock in a rate for the turbulent times? As rates continue to rise.


As I mentioned, you are only focused on your 5 year term but need to look at the life of your mortgage. Locking in a fixed rate means you will always pay a premium. You should instead choose the lowest rate available every time. A mortgage is not like a stock where you follow its price on a daily basis.



razz said:


> Does the IRD penalty also apply when selling ones property?


Yes. Whenever a mortgage term is broken, a penalty applies. You have the option to port your mortgage to another property or blend your rate - each lender handles this differently.



razz said:


> Can't the BoC raise rates more than 0.25% at a time, like 0.5% if they want. My understanding is that they meet 8 times a year to announce interest changes. Five BoC meetings/announcements could be done within a year, and the variable rates would catch up to the fixed rates.


Yes they can absolutely. Highly unlikely though. If ever it does increase to levels of concern, you could always convert to a fixed rate. However, renewal comes along and you will be faced with the same dilemma. 



razz said:


> Also for variable rates, when the rates rise, does the monthly payment increase? Or does only the interest portion of the monthly payment increase, decreasing the principal payment.


Usually, the payment increases but most lenders offer the option of increasing the amortization instead so you keep the same payment. Increasing the payment doesn't change your principal repayment - it only increases the interest portion to take into account the rate increase. Increasing the amortization will do the same thing since you stretch loan repayment.


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