With fixed mortgage rates trending lower in recent weeks, some homeowners are wondering if breaking their mortgage could same them money. While lower rates can be tempting, prepayment penalties—especially the Interest Rate Differential (IRD)—can be higher than expected, making early breakage costly, so find out what this could mean for you before making any moves.
The basics - how mortgage penalties are calculated
If you have a variable-rate mortgage, your prepayment penalty is usually straightforward: it’s likely three months’ worth of interest. But if you have a fixed-rate mortgage, your lender will typically charge you the greater of:
- Three months’ interest, or
- The Interest Rate Differential (IRD)
The IRD is where things may get tricky – and more costly. In its most general sense, it’s based on the difference between:
- Your current mortgage rate, and
- The rate your lender would charge today for a new mortgage with a similar remaining term.
Why do penalties go up when rates come down?
When interest rates fall, the IRD tends to get bigger. That’s because your existing mortgage rate is likely higher than the current rates your lender is offering. The bigger that gap, the more your lender loses if you break your mortgage early – and the higher the penalty you’ll pay.
In short: when rates fall, the cost of breaking your fixed mortgage can rise.
What you can do
If you’re wondering whether it makes sense to break your mortgage early and take advantage of lower rates, we can help you crunch the numbers.
Let’s chat before before you make a move and determine if this strategy is right for you!Type page body text here...