There’s an exciting opportunity to potentially save big on your mortgage—thanks to recent interest rate drops. Many have already saved thousands, and you might be able to do the same if you have a fixed rate mortgage above 5.3%.
Why This Matters Right Now
Back in 2023 and early 2024, mortgage rates were well above 5.00% for most fixed and variable mortgages. But here’s the good news:
- Current rates: 3-year, 4-year, and 5-year fixed rates are now in the low-to-mid 4% range.
- Penalty window: Most banks haven’t triggered their Interest Rate Differential (IRD) penalties yet. Penalties are currently at their lowest with many financial institutions—but that might change soon.
- Big savings: Clients are saving $350–$750 a month by switching, or knocking 7-8 years off their mortgage life(amortization).
How Fixed-Rate Penalties Work
When you break a fixed-rate mortgage early, lenders charge a penalty to compensate for lost interest. This is typically calculated in one of two ways:
- Three-month interest penalty: You pay the equivalent of three months’ interest on your current mortgage balance.
- Interest Rate Differential (IRD): This compares your current rate to the lender’s posted rate for the remaining term. If current rates drop significantly below your original rate, the IRD penalty can be much higher.
Why This Matters Now:
Many fixed-rate mortgages taken out last year or early this year still fall under the three-month interest penalty—making it a more affordable time to switch. But as posted rates change, lenders may soon start applying the IRD penalty instead. Once that kicks in, breaking your mortgage could become much more expensive, potentially erasing any savings from a lower rate. IRD penalties can be up to 4-5x more than the penalty to break at 3 months interest.
Why Waiting Could Cost You
In a declining rate environment, it might be tempting to wait for rates to drop further. But here’s the catch:
- Higher penalties: As fixed rates fall below your current rate, the IRD penalty increases. This could outweigh any savings from switching.
- Act now: The key isn’t to secure the absolute lowest rate—it’s about finding the right balance between a lower rate and a manageable penalty.
- Time matters: Each month you wait reduces the time left on your term, making it harder to offset the penalty with savings.
Think of this as the “sweet spot” for action: Rates are low enough to save, but penalties haven’t yet skyrocketed.
How Fixed-Rate Penalties Are Paid
One concern many homeowners have about breaking their mortgage early is the penalty cost. But here’s some good news: you don’t need to pay the penalty upfront.
When switching to a new mortgage, the penalty can be rolled into your new mortgage balance. This means:
- No out-of-pocket payment: You won’t need to come up with a large sum of cash right away.
- Smooth transition: The penalty gets absorbed into the new loan, spreading the cost over your mortgage term.
This approach makes it easier to take advantage of lower rates without the financial stress of paying a hefty penalty upfront. We’ll calculate everything to ensure the savings still outweigh the penalty and make the switch seamless for you.
Who Can Benefit?
Not everyone automatically saves by switching. Here’s what we need to check:
- Time left on your term: Ideally, you need at least 1.5 years remaining.
- Your current rate: If it’s above 5.3%, there’s a good chance switching makes sense.
- Penalty to break your mortgage: We’ll calculate if the savings outweigh the penalty.
Tip: Anyone who locked in their mortgage from mid-summer 2023 to early summer 2024 is likely eligible!
How It Works
If you want to know what your potential savings are, please email me with the following information:
- Current mortgage balance (can find it on the online portal)
- Current interest rate
- Current monthly payment
- Current lender
- Current remaining amortization (if you can’t find this let me know)
- Renewal/Maturity Date
Key Takeaways
- Rates are dropping: Fixed mortgage rates are now in the low-to-mid 4.00% range.
- Penalties are low (for now): Most lenders are still using the three-month interest penalty, but this could switch to the IRD soon.
- Act fast: Waiting for even lower rates might increase penalties and reduce your savings.
- Penalty flexibility: You can roll the penalty into your new mortgage, avoiding any upfront cost.
- Big savings: Many clients are saving $350–$750 per month or cutting years off their mortgage.
