Mortgage interest rates in British Columbia, and all across Canada, have been relatively stable since 2010, hovering around 5% on average for a five-year fixed-rate mortgage. The reality is that this stability can change at any time. Between 1979 and 1981, for instance, the mortgage interest rate jumped by 10% before quickly falling back down to 10% by the mid-80s and generally continuing its downward trajectory until it levelled out in the 2010s around 5%. Generally, this level of stability with mortgage rates has been uncommon throughout history, with multiple percent fluctuations being common year to year.
So what if the mortgage rate were to drop? Or you were to find a better deal or special at another bank or financial institution? Is it worth it to break your current five-year fixed-rate mortgage and face the penalty associated with this or just stick out your existing mortgage and hope for the best when it expires?
Why You Should Not Break Your Mortgage
The simple answer is “no” you should not break your mortgage early to get a good deal at another bank. The reason is that the penalty is not as cut and dry as most people think. Many people wrongfully believe that they will have to pay three months of interest if they want to exit their mortgage, but the reality is that you will have to pay an Interest Rate Differential. To calculate this, you take what your current rate is and the remaining time on your turn. Then you take the current lender (bank or financial institution) and subtract your rate for their best rate (this rate does not have to be posted). Multiply this result by the number of years left on your mortgage and then multiply that by the amount of money you still owe.
To break this down:
Let’s say you have a 5% five-year fixed-rate mortgage that you are two years into paying off with three years remaining. You find a better deal at another bank who are offering the same deal but at 3%. So 5% subtract 3% equals 2%. If you still owe $200,000 on your mortgage, then 2% (0.02) multiplied by three years multiplied by $200,000 equals $12,000. That is a significant penalty that you must pay in cash and cannot roll into your new mortgage rate.
But Would I Save Money?
So you have to pay a penalty of $12,000 and deal with the headache of switching over to the new financial institution. Would you save any money by switching? No. Not with these numbers. You will actually save almost $2,000 by sticking with your current mortgage than by switching and paying the penalty.
Is This True For Everyone? Talk to the Mortgage Brokers at Lending Experts
No, it is not true for everyone. Depending on how much you owe, how much time is left on your mortgage, and your current mortgage rate, switching may be a financially sound option. If you think that it might be the best bet for you then what you need to do is contact the team at Lending Experts. We will be able to walk you through your options and help you determine what your best financial path forward is, whether that be breaking your mortgage to get a better rate or sticking with your current prospects and waiting out your term. If you need mortgage advice, debt consolidation, or other financial services then contact us today in Burnaby, BC. We can help you find financial freedom.