Interest rate cuts | Is it time to break your mortgage?

Mortgage rates began a decline in 2024 which should continue this year, according to experts. Unless you have an open mortgage, is now a good time to break your contract before maturity? Here are seven questions to help you make a decision.

1. Is it true that the amount of the penalty is almost always equivalent to that of the potential savings?

“Yes, penalty calculations are normally made to discourage people from breaking their loan contract,” says Geneviève Audet-Gagnon, mortgage broker at Hypotheca. Everything has been calculated. »

“A client who wants to benefit from a rate reduction for an equivalent term, usually it is more or less worth it,” adds Patrick Dumond, mortgage broker at Multi-Prêts. For the customer who has two years of contract remaining and who wants a current term of two years, the savings will be canceled out. But there may be exceptions, it’s worth checking. »

2. Are there still advantages in certain situations?

“Right now, we are in a special situation, where people can possibly save money,” says Geneviève Audet-Gagnon.

Contrary to what one might think, it is not because of the large difference in rates between the peak reached in 2023 and that of today, explains the Hypotheca broker.

“We are in a curve which is a little different from the standard. The short term rates offered are more expensive than the long terms. Normally it’s the other way around. This situation has a consequence on the penalties that customers find themselves paying.

“We manage to have the penalty of three months of interest which is less costly than that calculated with the rate differential. This is therefore what is happening now for most of the loans which were taken out at rates a little higher than current rates. »

However, there is another issue that motivates clients to want to take advantage of this rate reduction, notes the mortgage broker at Multi-Prêts. “Beyond the economy, customers are calling us because they are out of breath, looking to see what they can do to reduce their monthly commitments. And then, in some cases, breaking your mortgage can be worth it. »

Mr. Dumond cites as an example a client who would like to benefit from the peace of mind of a longer term, such as five years, currently less expensive than two-year terms. “The recent drop in interest rates could allow it to benefit from interest savings in the next two years, then to have a monthly payment that is lower,” he indicates.

3. How will my penalty be calculated?

Penalties vary depending on the rate, whether it is fixed or variable.

For the variable rate, the penalty is always three months’ interest.

For the fixed rate, the lender chooses the greater of three months’ interest on your current loan or what’s called the rate differential. That is to say the difference between the interest rate displayed at the time of signing your contract and the interest rate currently displayed.

Because your rate may have benefited from a discount. For calculation purposes, the institution will take the rate that was displayed when you signed your mortgage loan contract.

“For example, a lender for a five-year term will have a posted rate of 6.79% and will offer the client a rate of 4.64%,” explains Patrick Dumond. Another lender will offer the same rate of 4.64%, but on a posted rate which will be 6.49%. Which means that the interest rate discount being higher, the penalty calculation will be greater later. »

The rates visible on lender sites already include the discount.

4. How much penalty should I expect?

“Penalties are usually higher with traditional lenders,” observes Patrick Dumond. This means that virtual lenders have been popular for several years, in particular because of their advantage in terms of calculating the penalty. »

“There are different things to take into consideration,” says Geneviève Audet-Gagnon. It depends on the time remaining, the amount of the clients’ mortgage loan and the institution where they are.

“Let’s compare two loans at a rate of 6%, but with different balances. The owner with a loan of $500,000 would have a penalty of $7,500 and the owner with a loan of $100,000 would have a penalty of $1,500. »

5. What should you check before making the decision to break your mortgage loan?

Both experts advise starting by contacting your financial institution to find out exactly what penalty will be applied.

“Before going too far in your efforts, it is important to consult an expert to check if it is worth it, since from one file to another, from one client to another, then from one lender to another, the penalties can be completely different,” relates Patrick Dumond.

“It’s case by case and today’s penalty can be based on the three months, then tomorrow, if the rate changes, the penalty will also change,” indicates Geneviève Audet-Gagnon.

“The customer who completed the exercise three months ago will have to ask their financial institution again for their penalty as of today to ensure that we are working on the right data. »

6. Are there any other fees to consider?

Property appraisal fees and notary fees.

“Everything is mathematical,” recalls Geneviève Audet-Gagnon. Some institutions will pay these fees to clients, but we still take them into consideration in the calculation to ensure that the client really has all the elements to make their decision. »

“Despite the notary fees, in certain cases it is still worth breaking your contract,” notes Patrick Dumond. And then sometimes, it’s not today. Sometimes it will be in a few months. »

For breaking a contract to be worth it, the rate difference must be between 0.75% and 1%, estimates Geneviève Audet-Gagnon.

7. If you took out a mortgage loan in November 2023 for five years at 6.47% and want to break it to get the current rate of 4.69%, is it worth it?

Geneviève Audet-Gagnon did the calculations for a loan of $500,000 and another of $400,000.

In the first case, the penalty is $7,952 and notary fees are $1,500. If the interest savings amount to $33,797, the actual savings are more like $24,345.

As for the $400,000 loan, the broker considered notary fees of $1,500 and a penalty of $6,361. She gets $27,037 in interest savings and $19,176 in actual savings.

“In these specific cases, I think it’s worth doing,” she says. However, it is always up to the client to determine whether or not it is worth breaking the mortgage, because we do not all have the same value in mind. For some, a savings of $3,000 will be enough to change. Others will say: “As long as I have to go back to the notary and go through the process, I prefer to stay where I am.” »