Updated: Nov 16, 2022
Is it worth breaking your current mortgage for a record-low rate?
Someone who locked in a 5-year fixed-rate just six months ago likely would have obtained a rate of around 3.39%, the going rate at the time.
With a comparable default-insured 5-year fixed-rate now as low as 1.99%, that may be too large of a spread for current borrowers to stomach.
Which begs the question: is it worth breaking your existing mortgage to obtain a lower rate? It’s a difficult question for many fixed-rate holders, who would stand to face a potentially crippling prepayment penalty.
The question was explored in a recent Rates.ca piece, which walked through a real-life situation of a borrower breaking a 5-year fixed rate of 3.39%, despite a $32,000 penalty, in order to lock into a much lower 2.29% 5-year fixed rate.
After making a 20% lump-sum prepayment and reinvesting the monthly mortgage payment savings back into the mortgage in the form of prepayments, the borrower surprisingly still comes out ahead by $19,248 after the five years.
While this strategy isn’t for everyone, it may be worth exploring if you’re currently locked in at a much higher interest rate. If you aren’t able to run a similar scenario like the one above for your own situation, it may be worth reaching out to a mortgage broker who could easily do the calculations to see if breaking your mortgage makes sense.