Should I Break My Fixed Rate Mortgage?

If you have a closed mortgage at a fixed rate, and you want to get out early, be prepared to pay a high penalty. The cost may be many thousands of dollars.

Most mortgages have a clause that says premature cancellation requires paying three months’ interest or an interest rate differential (IRD), whichever is greater. Most closed fixed-rate mortgages have a prepayment penalty that is the higher of 3-months interest or the IRD. Most variable-rate mortgages do not have IRD penalties.

The IRD is a compensation charge that may apply if you pay off your mortgage prior to the maturity date, or pay the mortgage principal down beyond the amount of your prepayment privileges.

The IRD is based on:

• The amount you are pre-paying; and,
• An interest rate that equals the difference between your original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of the mortgage.

Below are links to calculators:

[1] Let’s you estimate your mortgage penalty. Courtesy of Royal Bank
CLICK HERE     https://www.rbcroyalbank.com/cgi-bin/mortgage/tools/prepayment/prepayment-charge-calculator.cgi/start

[2] How much interest can you save if you refinance your mortgage?. Courtesy of Funds2Go  NOTE: Check the menu bar for more calculators!
CLICK HERE   http://funds2go.ca/java/CAShouldIRefi.html

Some lenders use posted rates for their IRD calculation and some use discounted rates. Some lenders round up to the next longest term when determining comparable IRD interest rates. Some round down. A small number of lenders prohibit breaking a mortgage early — regardless of the penalty —unless in the case of an approved bona fide sale. The moral: Always contact your lender directly for an exact penalty quote.