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If you are currently locked into a higher rate mortgage, you may be considering breaking it in order to take advantage of these low mortgage rates, but this isn't always a cheap process.
We asked Lola Gentile, a mortgage advisor with Scotiabank in Halifax, NS, to explain how to break a mortgage, and what makes it worth doing.
The cost of breaking your mortgage
When considering breaking your current mortgage, there are a number of factors to consider. "Number one, you have to look at the penalty that you will be charged to break the mortgage," says Gentile.
How much you'll be charged depends on the type of mortgage that you have, and can vary from one financial institution to another. Because of how lenders calculate the penalty, it can be difficult to have a clear idea of how much you'll be on the hook for until you actually talk to them.
"If you have a straight fixed rate mortgage, most penalties are calculated using the interest rate differential calculation; they take whatever the existing mortgage interest rate is on the day you break your mortgage, and then whatever the current interest rate is, then calculate the spread between the two rates," explains Gentile. "Plus, if you received an interest rate discount on the existing mortgage, that will be added into the calculation."
Read the fine print on your mortgage
Most institutions will calculate the interest rate differential on whatever the remainder of your term is, so if you are three years into a five-year term, your rate differential will be calculated based on the remaining two years.
"However, recently, with some of the extremely low interest rates that have been offered, it was in the fine print that if you break the mortgage, the interest rate differential would be calculated on the full five-year term no matter where you are in the mortgage when you break it. You really need to read that fine print, both in your existing mortgage and the one you'll be taking on," warns Gentile.
Page 1 of 2 -- When is breaking a mortgage really worth it? Find out on page 2. Variable rate mortgage
If you have a variable rate mortgage, things tend to be a lot simpler: "The penalty is going to be a straight three months interest," says Gentile.
However, she warns, if you got a cash-back mortgage, the lender is going to want that money back too, so it will be added on to the standard penalty.
When is breaking a mortgage worth it?
When Gentile is counseling clients on whether to break their mortgage and get one at a lower rate, she does a calculation to work out whether between the interest savings and the repayment savings, they'll recoup the cost of that penalty over the term of their mortgage.
"If you're looking at a difference of more than 1.5 per cent between your current mortgage and the new lower mortgage rates, it may well be worth incurring that penalty," she says. And of course, the longer you've had your current mortgage, the cheaper it will be to get out of, so that's another consideration.
Talk to your current lender
Because no financial institution wants to lose customers, you should talk to your current lender before breaking your mortgage early.
"They may be interested in doing an interest rate blend, where they lower your mortgage rate, and therefore your payment," says Gentile.
If you do end up taking your mortgage to another financial institution, don't be in such a rush to get remortgaged that you forget to do your homework about what you are signing up for.
"When you are shopping for a mortgage, it is easy to get hung up on the rate and people can't see anything else. But that really low rate comes at a cost on the back end of the mortgage so you really need to sit down and talk to somebody about every aspect of your mortgage," advises Gentile.
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