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Karim Ktiri

Karim Ktiri

Mortgage Broker

Language(s):
French
English
Arab

kktiri@planipret.com
(514) 608-2299

1430 boul. Saint-Martin O , #311
Laval, QC
H7S 1M9

Should You Break Your Mortgage to Get a Lower Rate?

When interest rates drop, many homeowners are wondering if it's worth breaking their current mortgage to lock in a better rate. While this may seem like a tempting opportunity, it's crucial to understand the potential costs involved, particularly the penalties for early repayment.

Penalties: A Commonly Overlooked Hurdle
Breaking a mortgage before the end of its term almost always incurs fees, known as early repayment penalties. These penalties can be particularly high, and borrowers are often surprised by the complexity of their structure and the amounts involved. Lenders often compensate reduced rates with significant penalties.

These penalties are typically calculated using one of two methods: either three months’ interest or the interest rate differential (IRD), which measures the difference between your initial rate and the current rate. Whichever amount is higher will be the one you need to pay. In some cases, this can make breaking the contract far more expensive than anticipated.

Why Penalties Can Be So High
When interest rates drop after you've signed your mortgage, it can directly impact the amount of the penalty. For instance, if your mortgage was signed at 5% and rates fall to 3%, the interest rate differential widens, which increases the penalty. So, while the prospect of a lower rate is enticing, the potential savings may quickly be wiped out by these fees.

It is also important to be cautious about the lack of transparency from lenders regarding these penalties. Often, lenders do not provide enough information on how the Debt-to-Income ratio (DTI) is calculated, especially when it is lower than three months' interest. This lack of clarity can lead to unpleasant financial surprises for homeowners.

The Trap of Posted vs. Discounted Rates
Another often misunderstood aspect is the difference between the posted rate at the time you signed your mortgage and the discounted rate you may have received through a broker. This distinction is crucial because it directly affects how penalties are calculated. A higher posted rate can lead to a larger penalty, even if you received a discounted rate along the way. It’s important to understand this dynamic before making any decisions.

The Importance of a Thorough Evaluation
Before breaking a mortgage, it's essential to conduct a full evaluation of your situation. This includes not only the early repayment penalty but also the remaining term of your mortgage, your current financial status, and the actual drop in interest rates. While this process can seem complex, working with a qualified mortgage broker can help provide a clear picture of the pros and cons.

Making an Informed Decision
Although falling rates can be tempting, homeowners must be aware of the hidden costs that could make breaking their mortgage less beneficial than it appears. Understanding how penalties work is essential to determining whether breaking a mortgage is truly worth it. A good mortgage broker will not only help you calculate the real costs but also guide you through this critical decision so you can take advantage of market opportunities without any unpleasant surprises.

Give us a call today and we’ll put our knowledge to work in helping you find the perfect solution!

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RATES OF

2024-11-29 00:00:00

TERMS BANKS MORTGAGE PLANNERS
6 months Fixed 7.85% 7.50%
1 Year Fixed 7.74% 5.84%
2 Years Fixed 7.34% 5.54%
3 Years Fixed 6.94% 4.34%
3 year closed Variable 7.35% 5.95%
4 Years Fixed 6.74% 4.29%
5 Years Fixed 6.79% 4.24%
5 years Variable 6.45% 4.90%
Refinance Fixed or variable 9.15% 4.34%
7 Years Fixed 7.10% 4.44%
10 Years Fixed 7.25% 5.09%
HELOC 6.95% 6.45%

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