28 March 2018
If you need this kind of flexibility to exit a mortgage early at any cost, you can take an open mortgage, but the rate will be much higher.
It should be noted that breaking a mortgage happens very often. According to some lenders, only a little more than half of borrowers with a five-year fixed mortgage reach the end of their term. Meanwhile, almost 20% have to pay a penalty for an early exit.
It depends on your mortgage conditions and the time you bought your home, but as a rule the penalty for breaking a fixed-rate mortgage with $400,000 balance can cost you $2,500-$5,000.
Although people think they will not change their lives drastically during the contract term, many of them end up breaking their mortgages for numerous reasons.
They divorce, face financial issues, decide to pay off the loan faster, want to refinance or simply sell the property and move to another place. And not all mortgages have a portability option for this case.
In some way, a variable rate mortgage is an insurance against significant changes in your life. In case you need to sell the property, you will have to pay only three months of interest.
At the same time, if you break a fixed-rate mortgage, you pay the greater of three months of interest or an interest rate differential (IRD). This IRD aims at offsetting the loss of interest to your bank, caused by your exiting the mortgage. Usually, big banks calculate the IRD very strictly, while smaller lenders may be more understanding.
Although it depends on the rate conditions at the market, still variable-rate mortgage penalties tend to be much lower than the IRD. In addition to it, variable rates may cost you less in total interest over the full life of the mortgage.
According to Mortgage Professionals Canada, from all the mortgages given in 2016 and 2017, 72% were fixed-rate, 24% were variable and 4% were a hybrid of both.
Such numbers show that most people don’t consider variable rates as profitable today as they used to be.
Of course, variable mortgages go with a certain level of risk. Today, your costs are low, but they can grow in the future. However, you can always switch to the fixed rate.
Another important thing is that in case the market faces NAFTA collapse or global downturn, the BoC may start cutting rates again, and then the variable rate owners will benefit from prime rate declines. And if you lock into the fixed option, there will be no way back until the end of your mortgage term.
When making the final choice, please, think about your lifestyle and financial possibilities. If there’s a strong chance of an early breaking, the penalty with a variable-rate mortgage will be cheaper for you. And this is a great reason to choose the variable option, but only if you are sure you can withstand a possible rate hike.