Is it worth paying the prepayment penalty?
With interest rates continuing to drop, many homeowners are tempted to break their current mortgage and secure a lower rate. But is it worth paying the prepayment penalty?
Mortgage Rates, both fixed and variable, are falling. This has many borrowers questioning if the long-term savings of a lower interest rate outweigh the immediate cost of penalties. Mortgage brokers, like Mike Imhoff of Meticulous Mortgages, caution that prepayment penalties can significantly affect the cost-benefit analysis of breaking a mortgage early.
Understanding Prepayment Penalties
For fixed-rate mortgages, prepayment penalties are typically calculated using either three months’ interest or the Interest Rate Differential (IRD) – whichever is higher. The IRD takes into account the difference between the posted rate at the time you signed your mortgage and the current posted rate. This often results in penalties that homeowners aren’t fully aware of. This is especially the case when the posted rate at the time of signing is significantly higher than today’s rate.
The key takeaway? While lower interest rates can be tempting, penalties can quickly add up.
Let Us Help You Decide
At Client First Mortgage Solutions, out team of experienced Mortgage Advisors are here to help you navigate complex financial decisions. We will assess your situation, explain how penalties may affect you, and help you make the best decision. Whether you are considering breaking your mortgage or exploring other refinancing options, we are here to answer all of your questions. Contact Us today!
Original Article – Canadian Mortgage Trends – Sept 19 , 2024
