If you get a 5-year fixed mortgage rate now, can you break early when rates fall?

Breaking has its costs. But it could be worth it.

By the Editors / September 19, 2023

In a hamster wheel waiting for lower mortgage rates? They’re not here yet, and you may be worried about buying or renewing at higher mortgage rates than you had hoped to see by now.

It’s likely an agonizing debate over a laptop of how long to lock in. A five-year rate might be more affordable now than a shorter-term rate, but if rates drop long before your term ends, a shorter term may allow you the chance to renew into a better rate sooner.

However, two or three years can seem like a long time to endure higher payments until then.

What’s the catch for breaking your 5-year term early?

That would be pre-payment penalties—a cost you’ll pay if you terminate your mortgage contract early for any reason. Otherwise, homeowners would always break for a better rate, and lenders’ fees and rates would increase (costing everyone more in the long run).

Fixed-rate penalties are usually higher than variable-rate penalties.

To break a fixed-rate term, you’ll pay an Interest Rate Differential (IRD) penalty or a three-month interest charge, whichever is higher. Unless there’s little time left in your term, you’ll likely pay the higher IRD penalty.

A variable-rate mortgage is cheaper to break—a three-month interest penalty because lender costs are lower for this mortgage type.

Even with a penalty, can you save if you break for a lower rate?

Let’s look at Tom’s situation—he asked a True North Mortgage broker for advice.

Tom took out a $100K mortgage two years ago at a five-year fixed rate of 5.75%. He saw a rate offer of 3.99% and wondered if it made financial sense to break his current term to get that rate.

He quickly realized he’d have to pay a hefty IRD penalty with his bank. Its current rate for calculating the remaining three years’ penalty was 4.50% (each lender uses its own IRD calculation, typically found in your mortgage fine print).

Tom’s penalty came to $3,750—but with the new rate of 3.99%, he would still save $1,350 by breaking his term.

Most lenders allow up to $3,000 to be added to the mortgage amount, meaning Tom had to come up with an extra $750. After some expert advice, Tom opted to break his mortgage, absorb the penalty cost, and benefit from the lower rate—directing his saved amount into other investments.

Every mortgage is unique—and so is the potential to save.

While Tom’s case illustrates the potential savings, everyone’s situation differs. As a mortgage holder, you’ll need to account for factors such as your ability to pay the penalty, your mortgage size and rate type (fixed or variable), the time left in your term, and the extra monthly budget room you could have.

If you break your term, make sure to get your best rate.

Tom decided to use True North Mortgage’s free service because their brokers are unified, salaried and non-commissioned for unbiased advice that has since saved him thousands—all with a stress-free process.

A top trusted mortgage brokerage in Canada, True North’s huge volume translates into a discount for your lowest possible rate. And access to several lenders and products means they can ensure you get your best deal.

Don’t be a hamster, be a Tom. Get sound mortgage advice in your preferred language and choices that fit you—to get out of the wheel and save on your mortgage. Give True North a shout today.