With fixed mortgage rates trending lower in recent weeks, some homeowners are starting to wonder if it’s worth breaking their mortgage to lock in a better deal, and we’re reviewing the potential savings with more and more homeowners.

But before making any moves, there’s one important thing to understand: your prepayment penalty could be higher than you expect—especially if rates keep falling.

Here’s why that happens, and what it could mean for you.

The basics: How mortgage penalties are calculated

If you have a variable-rate mortgage, your prepayment penalty is usually straightforward: it’s likely three months’ worth of interest. But if you have a fixed-rate mortgage, your lender will typically charge you the greater of:

• Three months’ interest, or

•  The Interest Rate Differential (IRD)

The IRD is where things may get tricky – and more costly. In its most general sense, it’s based on the difference between:

1. Your current mortgage rate, and

2.  The rate your lender would charge today for a new mortgage with a similar remaining term.

Why do penalties go up when rates come down?

When interest rates fall, the IRD tends to get bigger. That’s because your existing mortgage rate is likely higher than the current rates your lender is offering. The bigger that gap, the more your lender loses if you break your mortgage early – and the higher the penalty you’ll pay.

In short: when rates fall, the cost of breaking your fixed mortgage can rise.

With fixed mortgage rates already down sharply from their peak – and potentially heading even lower – IRD penalties are becoming a real concern for borrowers who locked in during the rate spike of 2022 and 2023. As the gap between your current rate and today’s lower rates grows, so does the cost of breaking your mortgage early.

Some lenders calculate IRD penalties using the rate difference between your existing mortgage and a current rate for a comparable remaining term. In some cases, especially with today’s unusual yield curve (where shorter-term rates may be higher than longer-term ones), this can result in even steeper penalties than borrowers expect.

What you can do

Before making any decisions about refinancing or breaking your mortgage early, it’s worth getting a penalty estimate, which I can help you with. Some lenders post online calculators, but they don’t always tell the full story – especially since penalty calculations can vary widely from lender to lender, so it’s important to get an expert to walk you through it.

If you’re wondering whether it makes sense to break your mortgage early and take advantage of lower rates, I can help you crunch the numbers.

Let’s chat before you make a move – it could save you hundreds or thousands of dollars in interest and could reduce your monthly cost!

Paul Macara
Mortgage Professional
(250) 857-4741
paul@macaramortgages.com

Spring is just around the corner -- even if there’s still snow on the ground! As the weather warms up, many homeowners start thinking about renovations to refresh their space, improve energy efficiency, or add value to their property. 

Whether you're upgrading your kitchen, adding a rental suite, or making energy-efficient improvements, there are several financing options to help make your project a reality.

One of the most cost-effective ways to fund a renovation is by leveraging your mortgage:

• Refinancing: If your home’s value has increased, you may be able to refinance your mortgage and access additional funds at a lower interest rate compared to personal loans or credit cards.

• Home Equity Line of Credit (HELOC): A HELOC allows you to borrow against your home equity, giving you flexibility to withdraw funds as needed during your renovation.

• Purchase Plus Improvements Mortgage: If you’re buying a home that needs work, this option lets you roll renovation costs into your mortgage right from the start.

• Renovation-specific loans: Some lenders offer loans specifically designed for home renovations, providing structured repayment terms and competitive rates. 

Government programs to consider

There are also government-backed programs designed to support home renovations:

• Greener Homes Loan: If you’re planning energy-efficient upgrades like new insulation, windows, or a heat pump, you could qualify for an interest-free loan of up to $40,000 through this federal program. 

• Secondary Suites Loan: Homeowners looking to create a legal secondary suite may be eligible for financing assistance to help offset construction costs. This is particularly beneficial if you plan to rent out the space for additional income.

• Provincial rebates and incentives: Many provinces offer additional rebates and incentives for energy-efficient home upgrades, such as grants for solar panels, insulation, and high-efficiency heating systems. These programs vary by province and can help offset renovation costs significantly, making eco-friendly upgrades more affordable.

• Municipal incentives: Some cities and municipalities also provide rebates or financing for home improvements, particularly those focused on sustainability and accessibility. Happy to share if there are any additional programs in your area.

Finding the right option for you

Each financing option has its benefits and requirements, so it’s crucial to find what fits your needs.
Consider factors like interest rates, repayment flexibility, and eligibility criteria before making a decision.
No matter the size of your project, the right financing can bring your vision to life without added financial stress.

Thinking about a spring reno? Let’s explore your options -- reach out today!

Paul Macara
Mortgage Professional
(250) 857-4741
paul@macaramortgages.com

A simple guide to fixed, variable, and adjustable-rate mortgages

With all eyes on mortgage rates the past couple years, choosing the right product can feel overwhelming, especially with so many options available. 

Whether you’re buying your first home or looking to refinance, understanding the differences between fixed-rate, variable-rate, and adjustable-rate mortgages (ARMs) can make a big difference in your decision-making. 

Here’s a quick and easy guide to help you understand these options.

Fixed-rate mortgages: Stability and predictability

A fixed-rate mortgage remains a popular choice among borrowers. According to a 2024 consumer survey by Mortgage Professionals Canada, 75% of borrowers opted for a fixed mortgage rate. However, interest in variable rates grew toward the end of the year as the Bank of Canada introduced several rate cuts.

Fixed-rate mortgage are not directly impacted by the Bank of Canada policy rate decisions. The interest rate stays constant throughout the term, ensuring consistent monthly payments for principal and interest, which makes budgeting easier.

Who is it for?

Fixed-rate mortgages are ideal for homeowners who prefer stability and plan to stay in their home for at least the length of the term selected. It’s also a good choice if you expect interest rates to rise in the future.

Key benefits:

• Predictable payments for the term of your mortgage

• Protection against rising interest rates

Considerations:

• The initial rate may be higher compared to variable or adjustable-rate mortgages

• Typically higher prepayment penalties if you break your mortgage before the end of the term

• Less flexibility if rates decrease during your term
  

Variable-rate mortgages: Savings with some risk

A variable-rate mortgage (VRM) offers an interest rate that fluctuates with the lender’s prime rate, which is influenced by the Bank of Canada’s policy rate. While your payments may remain fixed, the portion of your payment going toward interest versus principal can change over time as rates rise or fall.

Who is it for?

Variable-rate mortgages suit borrowers who are comfortable with some risk and believe rates may decrease—or stay low—over the term of the mortgage. It also suits individuals that may look at selling or refinancing before their term is up, as the penalties are more predictable than fixed rate mortgages.

Key benefits:

• Historically lower interest rates compared to fixed-rate mortgages

• Potential savings when rates drop

• Predictable pre-payment penalties

Considerations:

• Monthly payments may increase if rates rise

• Requires a tolerance for unpredictability

Adjustable-rate mortgages: A blend of flexibility and risk

An adjustable-rate mortgage (ARM) isn’t offered by all lenders in Canada. Scotiabank and National Bank are among Canada’s Big 6 banks who do offer it, and a number of Mortgage Finance Companies do as well. With an ARM, both your interest rate and monthly payment fluctuate with changes to the lender’s prime rate. Unlike a VRM, your payment changes immediately, typically within 30 days, when prime shifts, which can lead to greater monthly cost swings.

Who is it for?

ARMs may appeal to borrowers who want lower initial rates and have the financial flexibility to manage changes in monthly payments. As with VRMs, it may suit individuals that may look at selling or refinancing before their term is up, as the penalties are more predictable than fixed rate mortgages.

Key benefits:

• Typically offers lower starting rates than fixed or variable options

• Opportunity to pay less during periods of lower interest rates

• Predictable pre-payment penalties
  

Considerations:

• Payments can increase significantly if prime rate rises quickly

• Less predictable budgeting
  

Which mortgage type is right for you?

Choosing between these options comes down to your financial goals, risk tolerance, and how long you plan to stay in your home. A fixed-rate mortgage provides peace of mind, while a variable-rate mortgage offers savings potential with some uncertainty. 

Let’s find the right fit together

I’m here to help you weigh your options and choose the mortgage that works best for your unique situation. Whether you prioritize stability or are open to taking a calculated risk for potential savings, I’ll guide you every step of the way.

Reach out today to explore your options and make an informed decision about your mortgage.

Paul Macara
Mortgage Professional
(250) 857-4741 
paul@macaramortgages.com