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May 30, 2021

Just how much will it cost to get out of your current mortgage?

Interest rates are down sharply, which means your existing mortgage rate is likely higher than prevailing rate. Is this then a good time to renegotiate?


With a five-year fixed rate now around 2.7% in some spots, the savings can be significant – particularly if you’re still far away from paying things off.

But while the improved interest rate you might get is tempting, it's important to calculate how much you'd pay in penalties and how long it would take you to recoup the cost of financing. 


First off, you’re going to take a big hit, known as the interest rate differential or IRD, to break your contract. Once upon a time, that simply meant giving up three months interest – in other words, a penalty of a little less than your next three regular mortgage payments.

In this increasingly tight market, however, lenders are holding out for a stiffer penalty based on a formula that includes the size of the mortgage, the number of months you have left to run, and the difference between the current and existing rates – as well as a few company-specific charges since no two lenders calculate the IRD exactly the same way.

Late last year, the Financial Consumer Agency of Canada (FCAC) forced lenders to highlight formula descriptions on their websites. They've also been instructed to add "what-if" calculaters to company sites.

Trouble is, those penalty calculators aren’t yet reliable, maintains mortgage planner Robert McLister, the editor of CanadianMortgageTrends.com. And the difference in results can be significant.

ING Direct gets honours for providing the most user-friendly calculator, he says. It asks very simple questions and spits out a prepayment estimate with no confusion. The same can't be said for every bank, however.

The worst calculator, by far, is HSBC’s, he maintains. It forces you to look up more information than any other of the calculators, much of it too arcane for the average homeowner.

Have you renegotiated your mortgage recently? Was the IRD penaty what you expected? Was there any wiggle room with your lender?

By Gordon Powers, MSN Money




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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...