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Interest rates started to drop last year and while people with variable-rate mortgages have been vindicated in their choice, homeowners renewing their 3 to 5 year fixed-rate mortgages this year could see some savings coming their way.
With such an economic reality facing Canadians, homeowners will need to shop around to find the best rates and terms so they can see if it's worth switching their mortgage right now. You should always check current mortgage rates to see if you're paying more than the market. The great news is it’s entirely within your power to switch your mortgage before the end of your contract. However, it’s crucial to understand the potential costs involved, as it can be quite expensive.
People switch mortgages before their term is up for several reasons. Maybe they’ve decided to move, or maybe they want a lower rate. Sometimes, people switch to get more favourable mortgage terms or to swap their fixed-rate for a variable rate (or vice versa).
Whatever your reason for the mortgage switch curiosity, let’s dig into everything you need to know before switching your mortgage.
Key factors to consider before switching your mortgage in Canada
Switching your mortgage isn’t as easy as calling your broker and saying, “Hey, I think I’d like to try something new.” It’s not as simple as changing your clothes. There are a few things you’ll want to keep in mind.
Understand your mortgage contract
A mortgage is a binding contract you signed at the beginning of your term. You’re contractually obliged to uphold your end of the deal, namely paying your regular agreed-upon mortgage payments, which are based on your mortgage size, amortization period, term length and interest rate. However, you can switch your mortgage if you’ve found another one that makes more sense for your current situation.
Before doing that, read your current contract carefully. It will outline whether your mortgage is open or closed, which will help determine how much it will cost to break your mortgage. If yours is open, you’ll likely be able to break it without paying any fees. If, however, your mortgage is like most Canadian mortgages, it’s closed, and there will be fees associated with breaking your contract.
Assess interest rates
A big reason to switch mortgages is to get a better interest rate. Do your research to see what’s available, and speak to a broker to determine if you qualify for a low rate. After all, you likely want to switch your mortgage for a higher rate.
Use a mortgage calculator to crunch some numbers and determine how your monthly payments will be affected if you switch your rate and consider how much mortgage you can afford. Once you calculate the penalties you can expect to pay for breaking your mortgage, this will help you determine if the switch is worth it. This brings us to our next point.
Evaluate prepayment options and penalties
Before making the switch, consider the new mortgage terms. If you think you’d like to make additional mortgage payments in addition to your regular ones (these are prepayments and help you pay your mortgage off sooner), look to see what sort of prepayment privileges your potential new mortgage offers. Typically, mortgages allow for a specific amount of prepayments per year.
You’ll also want to take a close look at penalties. Not all mortgages are as open and relaxed as others. Depending on the lender, there might be penalties for late payments and penalties for breaking your mortgage (which your current mortgage might also have, and it leads us to our next point).
Consider the cost of breaking your mortgage
Before breaking your current mortgage and making the switch, it’s essential to understand if it makes financial sense. Assuming you qualify for a lower rate, you may save money on payments with your new mortgage, but you’ll likely have to pay a penalty for breaking your current mortgage.
Your lender can help guide you through the process, but penalties work differently depending on whether you have a fixed or variable interest rate.
For more information about details on these topics, feel free to contact me anytime at 647-701-1486 or email me at info@homesbyic.com
Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute financial, investment, or tax advice. While we strive to provide accurate information, tax laws are subject to change and vary by jurisdiction. You should consult with a qualified CPA, tax attorney, or financial advisor before making any decisions based on the content of this blog. Inder Chawla Real Estate Inc. is not responsible for any financial losses or tax penalties incurred.