Breaking our mortgage to beat the rate hike

Our five-year fixed rate mortgage term ends in July. I called our mortgage broker just before the recent rate hike to see if I could get preapproved and lock into a lower rate with a new provider on the early side (doing this at least gave us the option to switch lenders to a lower rate). Our broker came back to us with a much lower rate with a major bank.

By Caroline Cakebread

Updated November 2, 2012

Breaking our mortgage to beat the rate hike

It’s official - mortgage rates are headed up. A lot of you might be wondering whether it makes sense to ditch your fixed rate mortgage early in exchange for a new lower rate. After all, even one percentage point can make quite a difference on your monthly payments. For example, going from 5% to 4%, a monthly payment on a $200,000 with a 20-year amortization goes from $1,314.25 down to $1,107.34 - a savings of $206.91 a month.

Sounds like a no-brainer right? But what makes it a tough decision is the prepayment penalty lenders charge when you break your mortgage early. Most closed fixed rate mortgages have a penalty that is the higher of 1. three-months interest or 2. the interest rate differential (IRD). The IRD is based on the amount you’re pre-paying and an interest rate that your lender can charge today when re-lending the funds for the remaining term of the mortgage. Click here to calculate what your penalty would be if you break your mortgage.

We’ve just been through all this - and we decided to switch to a lower rate early. Our five-year fixed rate mortgage term ends in July. So I called our mortgage broker just before the recent rate hike to see if I could get preapproved and lock into a lower rate with a new provider before July (doing this at least gave us the option to switch lenders to the lower rate).

Our broker came back to us with a much lower rate with a major bank. We were preapproved and can keep the rate for 120 days - that gets us to a month before our mortgage term ends (which brings the penalty down).

But then, when our current lender quoted the penalty to us, I asked what they could do to keep my business when another bank was offering me a lower rate. They called the next day and offered to match the lower rate and make the switch right away - no penalty!

Whether it makes sense to break your mortgage depends on how much time you have left on it - I think it’s definitely worth shopping around to see what’s out there. Just make sure you do the math first.

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